Smaller company trusts come in from the cold

For the moment, out-of-favour funds have moved out of the ‘untouchable’ zone

After three and a half years of pull-outs, downgrades and coldshoulder treatment, investors in UK- focused smaller and mid-sized companies enjoyed a dramatic swing back to favour in the wake of the emphatic Conservative election victory last week.

Worries over a slowing economy, a hung parliament, more Brexit uncertainty and, most feared of all, a Corbyn-led minority administration with a programme of re-nationalisation, workers on boards, and huge rises in tax and borrowing kept apprehensive investors on the sidelines. Who dared take the risk ahead of the result of the most critical election in decades?

But last Friday saw a stock market equivalent of the relief of Mafeking: a surge of support swept the FTSE250 index comprising Uk-facing mid and small-cap companies more than four per cent higher initially on Friday before settling at 21,507 or 3.4 per cent higher at the close – an alltime high.

Since December 28 last year it has gained 3,642 or 23 per cent – a terrific reward for investors who stayed loyal – while since the EU referendum result it has gained more than 6,000 points, or 39 per cent.

But these stunning gains gloss over long months of inertia and investor avoidance as analysts wrung their hands over a feared economic slowdown and lost growth as a result of Brexit.

None of this makes the challenges ahead disappear: our growth outlook is still lacklustre, the details of our trade and tariff settlement with the EU have still to be negotiated, and the prospect of a full-on battle between the SNP and Westminster looms large, with the prospect of a second independence referendum with all the consequent uncertainty and concern for business in Scotland and for the future of its financial sector.

The immediate euphoria may not last once a sober assessment of prospects for 2020 come to the fore. For the moment, however, many out of favour funds and investment trusts have moved out of the ‘untouchable’ zone.

Smaller company trusts led the rally. Among those in the van of the advance were Henderson Smaller Companies with a 9.3 per cent surge in its shares to £10.70 and Jpmorgan Smaller Companies, up 8.5 per cent at 293p. Shares in Independent Investment Trust, with a strong bias towards housebuilding companies, gained 9.3 per cent. The £1.8 billion Mercantile Investment Trust, heavily invested in FTSE 250 and UK smaller companies, rose seven per cent to 264.2p. Standard Life UK Smaller Companies rose six per cent to 594.5p.

The post-election rally came too late for Mark Barnett, sacked last week as manager of the £1.1 billion Edinburgh Investment Trust. Shares here rose 3.5 per cent to 624p, while Mr Barnett’s other trust, Perpetual Income and Growth, gained 4.4 per cent. Aberdeen Standard Equity Income (where the performance of manager Thomas Moore came in for criticism from his chairman earlier this month) rallied 3.4 per cent to 408.5p.

Shares in infrastructure investment trusts were also in demand with the removal of the nationalisation threat. HICL Infrastructure was up 5.6 per cent at 169.8p while International Public Partnerships rose a similar percentage amount to 164.6p.

Mark Barnett has been replaced as manager of Edinburgh Investment Trust by James de Uphaugh of Majedie Asset Management Edinburgh chairman Glen Suarez said the board decided to act after ‘another very disappointing set of results’ with the trust’s net asset value falling 3.1 per cent in the six months to 30 September, well behind the 4.6 per cent return in the FTSE All-share. As the Citywire website noted, this followed underperformance trailing the All-share over five years with a 25.9 per cent return against the index’s 38.9 per cent.

Barnett was for years the protégé of Neil Woodford when the latter was at Invesco, and much of Edinburgh’s investment strategy echoes that of Woodford’s nowgated Equity Income fund, with a relatively heavy weighting in small-cap stocks. It will be interesting to see whether Majedie’s socially responsible investment approach extends to Edinburgh’s large holdings in BP and Royal Dutch Shell.

Edinburgh, it should be pointed out, has nothing to do with Scotland’s capital city, and is based in Henley-on-thames Majedie is a relatively young London-based fund manager, formed only in 2002 by a team out of Mercury Asset Management in the wake of the Merrill Lynch takeover. Why Majedie was chosen from the shortlist of four is unclear beyond a general preference for its a total return approach, where income is an important component rather than the primary driver of investment return.

But Majedie’s track record is hardly dazzling: the shares have lost 1.9 per cent over the past twelve months compared with a 15 per cent gain in its benchmark global index. And over five years Majedie shares have risen by 23.5 per cent against a gain of 83.3 per cent in the global index. A strong case could surely have been made for the Edinburgh management to pass to Baillie Gifford, or Scottish Investment Trust – or the multi-manager Alliance Trust.