Hard-pressed Schroder UK Mid Cap Fund (LON:SCP) disappointed investors by underperforming its benchmark in the half to March 2026.
But having bid Saba Capital goodbye, the trust has a stable base from which to grow going forwards. The US activist hedge fund exited Schroder UK Mid Cap’s shareholder register through a recent 35% tender offer.
Under the terms of the truce, Saba committed to a three-year ‘standstill’ period during which it will desist from further activist agitation.
Schroder UK Mid Cap’s manager Jean Roche believes the valuation case for UK mid caps is ‘as compelling as we can recall’. She points out UK mid caps now sit at multi-decade valuation lows relative to their own history, to UK large caps, and to most developed market peers. This suggests there is scope for a re-rating over time.
Negative return
Schroder UK Mid Cap delivered a negative net asset value (NAV) total return of 4.4% in H1, underperforming the FTSE 250 ex Investment Trusts Index’s 2.9% decline. The trust’s share price decline was 1.9% as the discount to NAV narrowed from 7% to 4.7%.
Gearing was a modest detractor from the fund’s relative returns. Stock picking proved positive in the consumer discretionary sector. This more than offset the impact of being overweight a weaker part of the market as the UK consumer battened down the hatches.
Winners and losers
Top stock contributors in H1 included alternative asset manager Man Group (EMG:LON), shipbroker Clarkson (LON:CKN) and oil and gas company Harbour Energy (LON:HBR).
Leading detractors included multi-utility Telecom Plus (LON:TEP), private hospital operator Spire Healthcare (SPI:LON) and media business Future (LON:FUTR).
Mid caps case ‘intact’
While geopolitical developments and UK political uncertainty have weighed on short-term investor sentiment, chairman Harry Morley insisted: ‘The long-term investment case for UK mid caps remains firmly intact, and the board is optimistic about the company’s prospects.’
Admittedly, the economic outlook for the UK remains uncertain. Yet mathematics whizz Roche argued: ‘The valuation case for UK mid caps is as compelling as we can recall. The FTSE 250 Index is trading on approximately 11 times forward earnings – well below its long-run average and at a significant discount to the US, Europe and UK large caps.’
Roche also noted the undervaluation of UK mid caps is increasingly being recognised through corporate activity.
Buyback capital of the world
‘Trade buyers and private equity continue to pursue acquisitions at significant premia, seeing the same opportunity we do,’ explained Roche.
‘And UK companies themselves are buying back their own equity at record rates. The UK has become the buyback capital of the world, which is a clear signal that management teams believe their own shares are too cheap.’
Roche said the companies in her portfolio are trading at prices she believes ‘significantly’ understate their worth.
‘As active stock pickers with deep knowledge of this market, we see that gap as an opportunity – and one that, in our experience, will not persist indefinitely. We therefore look to the future with great confidence in what the company can deliver for its shareholders.’
Schroder UK Mid Cap Fund’s short-term performance has been poor. But keep in mind that the trust has delivered NAV outperformance of its benchmark over one, five, and 10 years.
The 35% tender has shrunk the size of the trust. But as QuotedData’s James Carthew argues, this strong long-run record justifies an independent future.
Schroder UK Mid Cap Fund looks well-placed for a recovery if there is a UK mid cap revival.
It is also worth remembering that the fund’s opportunity set is not entirely beholden to UK economic conditions. Almost half of FTSE 250 revenues are generated internationally, and many of the fund’s holdings have negligible exposure to the domestic economy.
Read the press release here: https://www.londonstockexchange.com/news-article/SCP/half-year-financial-report/17660682
