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Questor is The Telegraph’s stock-picking column, helping you decode the markets and offering insights on where to invest.
Investors in the UK’s small and mid-cap companies have endured a sustained period of truly abysmal performance. Having reached all-time highs in 2021, the FTSE 250 and FTSE Small-Cap indices subsequently slumped and currently trade 13pc and 9pc below their respective peaks. By contrast, the FTSE 100 index reached a new record high this year and currently trades just 2pc below it.
In Questor’s view, however, small and mid-cap stocks are now poised for a comeback. The UK economy’s long-term outlook is becoming increasingly upbeat, with inflation due to fall to the Bank of England’s 2pc target following a temporary rise in the short run. This should allow for a brisk pace of interest rate cuts that boost the economy’s performance and create operating conditions that are more conducive to profit growth.
Since small and mid-cap companies listed in the UK typically have significantly greater exposure to the domestic economy than their larger peers, they are likely to be the biggest beneficiaries of an improving economic outlook – and trading on dirt-cheap valuations after their recent demise, we are highly optimistic about their prospects over the long run.
As a result, the JPMorgan UK Small Cap Growth & Income investment trust becomes the latest addition to our income portfolio. Although it has a rather humdrum historic yield of 3.1pc, its prospective income return currently amounts to roughly 4.4pc as a result of an updated policy that aims to pay 4pc of net assets as a dividend each year.
Over the past three years, the trust’s shareholder payouts have risen at an annualised rate of 21pc. This compares favourably to an inflation rate that has averaged a heady 6.3pc over the same period.
Clearly, a dividend policy that pays out a fixed percentage of net assets each year is likely to equate to a highly changeable income stream for investors. This is especially the case given the trust’s focus on smaller companies, whose share prices are inherently volatile. With a gearing ratio of just under 11pc, too, its share price could fluctuate to a significantly greater extent than the wider stock market.
In this column’s view, however, the fund’s attractive long-term prospects more than offset its capacity for short-term volatility. As well as the benefit of relatively high gearing in what Questor anticipates will be a rising wider market, the company’s share price offers excellent value for money.
It currently trades at a 10pc discount to net asset value. This is slightly wider than its average discount of 8pc over the past year and suggests it offers capital growth potential as investor sentiment improves in response to an increasingly upbeat UK economic outlook.