Stocks going higher
Stocks consolidate gains after central bank rate holds / Image source: Adobe
  • Trust returns to long-run outperformance trend
  • Benchmark-beating 17.6% return
  • UK mid-caps cheaper than large-caps

Jean Roche-run investment trust Schroder UK Mid Cap Fund (SCP) returned to form in style over the year ended 30 September 2023, delivering a net asset value total return of 17.6% versus the disappointing 30% decline in the previous year.

This beat the 13.6% total return from the benchmark FTSE 250 ex-Investment Trusts Index as UK mid-caps shrugged off negative headlines to deliver strong returns and the trust’s shareholders benefited from the manager’s astute stockpicking.

Roche, a former analyst with a masters in mathematics, said the year ‘yielded a welcome return to the long-term trend of outperformance’ for Schroder UK Mid Cap ‘with a positive, inflation-beating total return’.

She sees ‘opportunity in the fact that UK mid-cap aggregate valuations are now sitting at a discount to where they started in autumn 2022. Most strikingly, they are on a discount to UK large-caps, and the yield of the dividend payers in the Mid 250 index is now at an aggregate 5.3% for the 12 months ahead, versus 4.6% for the FTSE 100.’


Mid-cap companies are attractive to investors for a variety of reasons; more established than smaller firms, they are considered less risky, yet they also tend to be faster-growing than their larger, more mature counterparts.

Roche refers to the FTSE 250 as the ‘Heineken index’ since it is often refreshed by promotions, relegations, takeovers and initial public offerings (albeit IPOs have been scarce of late).

Despite negative sentiment towards the UK market, the fund’s double-digit NAV total return was delivered as Roche and co-manager Andy Brough stuck to their strategy of choosing ‘resilient businesses which can deliver high risk-adjusted returns with rising cash flows and earnings’, said Roche.

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Strong stock picks in consumer-facing companies Games Workshop (GAW), the group behind the Warhammer franchise, homewares retailer Dunelm (DNLM) and food manufacturer Cranswick (CWK) underpinned the outperformance, while promotional products business 4Imprint (FOUR) appeared in the trust’s top five contributors table for the second year in a row.

The most significant detractor to performance was cybersecurity business NCC (NCC), which was sold after seeing softer demand for its services as large US West Coast technology customers deferred buying decisions and experiencing a margin squeeze from cheaper overseas competition.

Not owning retailer Marks & Spencer (MKS) and Hikma Pharmaceuticals (HIK), both of which were promoted to the FTSE 100, also detracted from performance, while holdings in mining engineer Weir (WEIR) and distributor Diploma (DPLM) were sold on their promotion to the blue-chip benchmark in line with the company’s stated policy.


New additions to the portfolio include Babcock International (BAB), where Roche sees ‘growing demand for the company's defence and nuclear services, combined with an improved balance sheet, following several disposals’, as well as resilient soft drinks business Britvic (BVIC), the Robinsons, Tango and J2O brand owner which has successfully managed the recent spike in inflation.

Schroder UK Mid Cap has also bought shares in Israeli gas company Energean (ENOG) on ‘the expectation of a near doubling of its gas production by the end of 2024, and a return of value to shareholders of at least $1 billion by the end of 2025’, and snapped up stock in the likes of engineering firm Senior (SNR), challenger bank Virgin Money (VMUK) and chemicals concern Johnson Matthey (JMAT).

‘Our new holding in WH Smith (SMWH) is our main exposure to the travel sector,’ explained Roche, noting that the group’s airport concessions are ‘well placed to benefit from improving trends in this sub sector. The company has been successful in winning new locations in US airports, and has a large backlog of stores won but not opened that will drive growth in the future.’


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Issue Date: 13 Dec 2023