These are difficult times for investors in funds that are involved in smaller companies. The shakeout has hit the shares of many smaller companies hard, which has led to heavy price losses.
Nowhere was the pain as painful as the Invesco Perpetual UK Smaller Companies Investment Trust. His shares have fallen nearly 12 percent over the past month, and manager Jonathan Brown, quite frankly, does not believe things will improve until a Brexit deal is made.
Even then, a combination of higher interest rates and a fierce trade war between the United States and China threatens to destabilize global stock markets, which will further aggravate investors in UK funds with smaller companies.
Together with Deputy Manager Robin West, Brown was busy protecting shareholders from the worst market crashes. However, this was a fight. The defensive measures include a five percent cash component and no expensive bonds to denounce shareholder investment.
The managers have also tried to build a resilient portfolio. But as Brown says, "As an investment manager, you do not beat the Federal Reserve. As interest rates rise, stocks fall. "
The Trust's portfolio currently includes 78 equity investments, which are composed of the bottom 10 percent of the UK equity market by market capitalization. It includes a number of FTSE 250-listed companies, including filament manufacturer Coats, pharmaceutical company Clinigen, IT consulting firm FDM and Hilton Foods.
In addition to the "smaller company" label, the common theme of trust is a focus on companies that can grow independently of developments in the economy. This "independence" may be due to product innovation, the ability to engulf competitors and gain economies of scale, or favorable "structural" changes in the industry in which a business operates. An excellent example of "innovation" is the Coats Group, the trust's second largest position. Brown says, "A third of the shirts produced worldwide are held together by Coats. What I like, though, is the fact that it has built an Internet presence that allows manufacturers to order threads quickly in response to the advances in fast fashion. "
In terms of consolidators, Brown believes the Johnson Service Group is a perfect example. The company supplies bed linen and tableware for hotels and restaurants. "Johnson has continually bought up its competitors," says Brown. "The result is that by increasing the number of customers it is able to reduce unit costs, which leads to an increase in profits."
Trust has two qualities that sets it apart from rivals. First, you want to maintain an attractive annual dividend of around four percent. Second, managers have the right to charge a performance fee if confidence is better than their benchmark – the Numis Smaller Companies Index.
This can increase the annual management fee of 0.65 percent by another percent. By the end of January 2018, a performance fee of £ 2.6m had been deducted from the profits of the Trust, compared to £ 1.2m in annual management fees. To put this into context, the trust's assets are estimated to be in excess of £ 150m. Despite the fees – or perhaps because of them – the share price of the trust has risen by 85 percent in the last five years. Only two out of 13 other small British companies have achieved better returns.