Results analysis from Kepler Trust Intelligence

Schroder UK Mid Cap (SCP)

04/07/2025

Results analysis from Kepler Trust Intelligence

Schroder UK Mid Cap (SCP) has released its financial results for the half-year period ended 31/03/2025. The trust's NAV declined by 9.3% and its share price by 4.4% over the period, compared with its benchmark, the FTSE 250 ex-Investment Trusts Index, which fell by 7.9%. Over the same period, SCP's discount narrowed from 12.3% to 7.9%.

However, performance has been strong since the start of the second half of the trust's financial year, with SCP delivering a NAV total return of 10.7% from 01/04/2025 to 27/06/2025, outperforming the FTSE 250 ex-Investment Trusts Index, which has returned 8.4%. SCP's long-term performance record also remains strong, with a five-year NAV total return of 61.8% compared to 52.5% for the benchmark.

In March, the board announced a series of strategic initiatives aimed at enhancing shareholder value and improving market perception. These include a commitment to a more active share buyback policy, a reduction in the management fee, and a continuation vote.

An interim dividend of 6.3p per share for the ongoing financial year will be payable on 08/08/2025, representing a 5% increase year-on-year.

Gearing stood at 9.5% at the end of March and remained at a similar level at the end of May. This relatively high gearing reflects the opportunities that managers Jean Roche and Andy Brough are seeing in the market.

Board chair, Harry Morley, said: "Emerging signs of an end to the era of the dominance of US technology stocks in global market returns may herald a return of equity investors to help to correct the valuation dislocation which has developed among UK mid-caps."

Kepler View

The six-month period to the end of March 2025 proved challenging for UK mid-caps, marked by continued fund outflows and rising long-term bond yields as inflation expectations were revised upward. Market sentiment was further dampened by concerns over the UK government's fiscal policies announced in the Autumn Budget (30/10/2024), which added to cost pressures for companies and impacted market perception of the UK's macroeconomic outlook. Against this backdrop, Schroder UK Mid Cap (SCP) was further affected by its underweight position in the financial sector and the underperformance of some of its technology holdings. However, there were also some encouraging developments during the period. For instance, holdings involved in the defence supply chain stood out.

However, performance has improved significantly since the end of the trust's first half of its financial year (to 27/06/2025), with SCP delivering a mid-teen NAV TR and outperforming its benchmark during that period. Despite this, we believe the FTSE 250 Index remains attractively valued, particularly relative to the FTSE 100, which may indicate undervaluation. As mid-caps have historically tended to trade at higher multiples than large-caps, the current discount of the FTSE 250 Index (relative to the FTSE 100) may provide a compelling entry point into UK mid-caps. Given SCP's dedicated focus on this segment of the UK equity market and its strong long-term track record of outperformance, we see it as an attractive strategy for gaining exposure to this asset class.

Finally, we believe the strategic initiatives introduced by the board strengthen SCP's investment proposition. In particular, we think the new management fee structure aligns the manager's interests with those of shareholders, as it is now tied to market capitalisation.

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