Standard Life UK Smaller Companies Trust (SLS) has performed very well in the past but over the last few years it has not done so well. However, over its last financial year to 30 June it made a net asset value (NAV) total return of 14.2 per cent against 10.4 per cent for its benchmark, the Numis Smaller Companies (ex Investment Companies) Index. "Through this tough period, the manager has been firm in sticking to its well-defined investment approach, focusing on growth stocks, and this now appears to have borne fruit with a return to outperformance," explain analysts at Numis Securities.
Over its last financial year the trust's performance was helped by overweight positions in healthcare, retail and software, a decent position in real estate, and low exposure to the oil & gas, mining and engineering sectors.
- Positioned in area set to do well
- Discount to NAV
- Good one-year performance
- Exposure to UK economy
- Discount has been wider
IC TIP RATING
Tip style: GROWTH
Risk rating: HIGH
Timescale: LONG TERM
Performance is even better over one year to the present: NAV total return is 18 per cent against 8 per cent for the benchmark and well ahead of the 12 per cent average return for UK smaller companies investment trusts, putting it among the top three performers.
Its share price returned 8.5 per cent over the year to 30 June and 16 per cent over the last 12 months, meaning it trades at a discount to NAV of 6.4 per cent. But in the past the trust has traded at tighter levels, including at times a premium to NAV, so if its performance continues to improve the discount could tighten.
The fund has recovered strongly after previous periods of underperformance, such as in 2008, and analysts at Winterflood say: "There will be times when the performance of Standard Life UK Smaller Companies will lag its benchmark, particularly when market conditions are volatile. However, we believe that the manager's investment process provides him with the ability to continue to outperform over the longer term. Therefore we would regard any discount weakness as a buying opportunity, particularly given the fund's discount control mechanism."
The trust has a policy of buying back shares at discounts above 10 per cent and implementing tender offers when share buybacks are not sufficient to maintain the discount at an acceptable level.
The trust has increased exposure to high-quality growth businesses with earnings visibility, particularly in healthcare, software and leisure, and reduced exposure to high-growth or more speculative growth businesses. The trust's manager, Harry Nimmo, says its overall risk profile is lower than it was a year ago.
Around 70 per cent of the underlying holdings' profits come from the UK. Mr Nimmo says the UK economy is growing steadily, providing a benign environment for UK small- and medium-sized listed companies. He also says the outlook for corporate profits is still very positive, although companies in more cyclical sectors are showing profit margins at or near cyclical peaks, meaning he has a preference for businesses growing organically.
Valuations for smaller companies remain towards the upper end of the spectrum, leaving the market open to the threat of correction. There is also no guarantee that the trust's performance will turn, or that the discount to NAV will tighten further - it has already tightened from double-digit levels over the last few months.
However, the vast majority of the trust's companies have net cash positions and can grow from internally generated cash flows, while it has a strong long-term track record and has previously recovered from difficult periods.
So, if you have a long-term investment horizon and want exposure to a relatively healthy economy and the potential for smaller companies, with maybe some discount tightening, then Standard Life UK Smaller Companies Trust could be a good bet. Buy.
STANDARD LIFE UK SMALLER COMPANIES TRUST (SLS) | |||
PRICE: | 321p | GEARING: | 6% |
AIC SECTOR: | UK Smaller Companies | NAV: | 350.38p |
FUND TYPE: | Investment trust | PRICE DISCOUNT TO NAV: | 6.4%* |
MARKET CAP: | £215.7m | YIELD: | 1.4%* |
NUMBER OF HOLDINGS: | 59** | ONGOING CHARGE: | 1.19% |
SET-UP DATE: | 19 August 1993 | MORE DETAILS: | standardlifeinvestments.com |
Source: Morningstar, *Winterflood & **Standard Life Investments
Share price performance
1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | |
Standard Life UK Smaller Companies | 16 | 60 | 134 |
Numis Smaller Companies ex investment companies (ICs) Index | 8 | 63 | 109 |
FTSE Small Cap ex ICs | 8 | 76 | 110 |
UK smaller companies trust average | 17 | 96 | 175 |
Source: Winterflood, as at 1 September 2015
Top 10 holdings, as at 31 July 2015 (%)
Ted Baker | 4.3 |
Workspace | 3.9 |
Telecom Plus | 3.4 |
Moneysupermarket.com | 3.3 |
Emis | 2.8 |
Computacenter | 2.6 |
Greggs | 2.6 |
Victrex | 2.5 |
Rightmove | 2.5 |
CVS | 2.5 |
Sector breakdown (%)
Consumer services | 29.2 |
Industrials | 20.6 |
Financials | 15.5 |
Information technology | 14.5 |
Consumer goods | 11.3 |
Healthcare | 7.8 |
Telecommunications | 5.1 |
Basic materials | 2.7 |
Oil & gas | 0.4 |
Net borrowing | -7.1 |