Yahoo Finance An excellent track record and large discount equates to an attractive buying opportunity
While the FTSE 100 flirts with a record high, the FTSE 250 remains firmly in the doldrums. It is down 18pc from an all-time high reached in September 2021 and trades no higher than it did five years ago.
Of course, the UK’s challenging economic outlook has not been conducive to buoyant investor sentiment towards mid-cap shares.
The Bank of England is currently forecasting the longest recession in the UK’s history, with rapidly rising interest rates, extreme inflation and weak consumer confidence set to prompt a tough period for domestically focused companies.
Likewise, the IMF expects the UK economy to contract by 0.6pc this year to be the world’s worst-performing advanced economy.
Since FTSE 250 members generate around half of their revenue from the UK, versus a quarter for FTSE 100 constituents, the mid-cap index is more exposed to domestic economic challenges than the large-cap index.
An uncertain political period since Brexit has also weighed on mid-cap shares over recent years. This has added to the appeal of large-cap stocks as investors seek less risk and greater diversity during periods of elevated turbulence.
As ever, Questor favours the purchase of high-quality holdings when their near-term prospects are severely challenged. During such periods, weak investor sentiment means they can offer excellent value for money and greater scope for long-term capital gains.
And with the FTSE 250 having delivered a total annualised shareholder return of 10.3pc in the 30 years following its inception in 1992, the index’s poor performance over recent years suggests there is a buying opportunity on offer for long-term investors.
The Schroder UK Mid Cap investment trust is a simple and straightforward means to capitalise on the FTSE 250’s relative appeal. The trust has risen by 32pc since first being tipped by this column in April 2020, but still trades at a 13pc discount to net asset value.
It has a solid track record of outperformance versus the wider index, having generated a capital gain of 8.8pc per annum compared with 6.6pc per year for the mid-cap index over the past decade.
While that may not sound too impressive at first glance, it means £10,000 invested for a period of 20 years in the trust would have grown to in excess of £54,000 versus around £36,000 for an investment in the wider index.
The trust aims to hold 40-50 companies in what is a high conviction portfolio. Its 10 largest positions currently comprise names that regular readers of this column will be familiar with, including recent tips Oxford Instruments, Spectris and Diploma.
Such holdings contribute to the trust’s 14 percentage point overweight position in the industrials sector compared with the index, while it has no exposure to the energy or utilities industries.
With gearing of 8pc, its share price performance is likely to be more volatile than that of the FTSE 250 in the short run. For long-term investors, though, gearing magnifies positive returns in what is likely to be a rising stock market that recovers to post new record highs over the coming years.
Clearly, it is impossible to determine when mid-cap shares will ultimately deliver on their potential. Significant economic and political risks remain on the near-term horizon.
They could prompt investors to retain their downbeat assessment of UK-focused stocks, while creating difficult operating conditions for domestically focused businesses that weigh on their profitability.
However, since half of the index’s revenues are generated abroad, the FTSE 250’s performance will not solely be determined by the UK’s economic prospects. With China reopening and the US Federal Reserve shifting to a less hawkish stance, many mid-cap shares could experience better operating conditions as the global outlook gradually improves.
Furthermore, the UK’s economic and political woes are extremely unlikely to last in perpetuity. The mid-cap index’s history shows that it has always overcome such challenges.
In Questor’s view, periods of decline present opportunities for investors to buy in at more attractive prices. Given the trust’s large discount and excellent track record, it remains a worthwhile long-term purchase.
Questor says: buy
Ticker: SCP
Share price at close: 580p
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