Bill Jamieson: Avoiding the small company investment blues

Sentiment should have no place in an investment portfolio is the commonplace advice for private investors. De-clutter your nest egg of yesteryear's favourites. Sell up and move on.
Smaller firms can yield spectacular returns, but Bill Jamieson warns that success is not guaranteed. Picture: Daniel Leal-Olivas/AFP/Getty ImagesSmaller firms can yield spectacular returns, but Bill Jamieson warns that success is not guaranteed. Picture: Daniel Leal-Olivas/AFP/Getty Images
Smaller firms can yield spectacular returns, but Bill Jamieson warns that success is not guaranteed. Picture: Daniel Leal-Olivas/AFP/Getty Images

It’s sound advice in the main. But it can be hard to follow. And in my own case I stalled last week at taking it.

For many years I have had a small holding via an ISA in the Invesco Perpetual UK Smaller Companies Trust – the former home of stock market wizard and fund manager extraordinaire Neil Woodford. I have been reasonably happy with its performance. But last week my stockbroker wrote to me saying they have been selling out of this trust. The clear message was that I should follow suit and sell.

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No compelling reason was given other than an implication that the trust had lost its lustre. And it is certainly the case that smaller company investment trusts have not enjoyed a narrowing of their discounts to the same degree as their mega cap counterparts.

And how unexciting Invesco Perpetual may now appear after Neil Woodford left to branch out on his own with his eclectic management style. He now runs the £8.5 billion CF Woodford Equity Income fund and the £800 million Woodford Patient Capital Investment Trust.

What has prompted the broker missive is that the Invesco board is offering shareholders a continuation of their investment together with the alternative of a tender offer at a level close to NAV. Shareholders wishing to realise part or all of their investment have a chance to do so through a tender offer for up to 40 per cent of the shares in issue. This realisation, it seems, is an offer I shouldn’t refuse.

But how has Invesco Perpetual Smaller UK Companies performed? According to Numis Smaller Companies research, it has achieved a net asset value per share total return of 21.3 per cent compared with a benchmark return of 18.6 per cent. The share price total return over the past 12 months was 22.9 per cent.

I also note from Trust Net that the shares are up 30 per cent over one year and 171 per cent over five, significantly outperforming the smaller companies sector over both periods. Performance has been firmly in the top quartile and the current yield is 3.5 per cent.

As for dividends, three interim dividends of 3.45p each have been paid and the board has announced a proposed final payout of 6.75p per share, making a total dividend for the year of 17.1p. For shareholders choosing to remain, the trust will continue to be managed in the same way that it is now. Consistent with the current dividend policy, and in the absence of unforeseen circumstances, it intends to pay a dividend for the year to 31 January 2018 of 17.1p per share, which equates to a yield of approximately 4 per cent at the 2017 year end.

Why, then, should I move to the exits? Regular readers will know I’m a defensive sort of guy and have tended to favour investment trusts with a good dividend record and/or standing on a discount to net assets, offering some semblance of value in a market that looks fully priced.

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It really is spooky how markets overall have held up over the last six months despite the traumas of  Brexit, the maverick Donald Trump presidency, the European elections and now our own UK general election. But I don’t want to reduce my exposure to defensive equities, I like investment trusts and favour income as a proven route in many cases to superior overall capital return.

What alternatives may be on offer? When it comes to smaller companies, Woodford has enjoyed a cult following but the wheels have started to wobble on his investment trust due to smaller company disappointments.

The much-trumpeted Woodford Patient Capital Trust has suffered notable setbacks, in particular the intellectual property company Allied Minds and pharmaceutical company Circassia, both of which have suffered sharp share price falls in recent weeks. The overall result is that shares in Patient Capital are down 8.1 per cent over the past 12 months while the UK all companies index is up 20.6 per cent over the same period.

As for the smaller companies sector overall, while trusts focused on this end of the stock market performed well last year, the rating on many of their shares remains lacklustre.

It is a sharp reminder that while smaller firms can often yield spectacular returns, even for acknowledged fund maestros like Woodford, success is by no means guaranteed.

My inclination for now is to stick with Invesco UK Perpetual Smaller Companies pending an attractive alternative home for my investment in this sector. Suggestions welcome!