Schroder UK Public Private Trust: December update 2020

• The trust aims to deliver a return in excess of 10% per annum over the longer term, but nothing can be guaranteed
• The managers will continue to focus on high growth, developing and innovative companies
• Schroders has 20 years’ experience in private equity investing

How it fits in a portfolio

The Schroder UK Public Private Trust aims to deliver long-term capital growth by investing predominantly in mid to large sized, quoted and unquoted UK companies. We think it could help bring diversification to a portfolio with little exposure to the UK. Investors in this trust should be comfortable with the risks associated with unquoted companies, because they are less easy to trade. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to net asset value (NAV).

Manager

Tim Creed, Head of European Private Equity and Ben Wicks, Head of Data Insights and Research Innovation, have run the trust since Schroders took over in December 2019.

Creed started his career as a research chemist at AstraZeneca and prior to joining private equity business Schroders Adveq in 2004 he was a project manager at Aon. Wicks joined Schroders as a graduate in 1999 and spent the first six years as an analyst in the pan-European equity team. He left in 2005 and worked for the civil service, in the Ministry of Defence and Foreign Office, for eight years before returning to Schroders in 2013.

The managers have a strong combination of public and private equity expertise alongside the full backing of Schroder Asset Management. They can also utilise the support of more than 150 analysts who help with analysis, challenge and stock ideas.

Process

It’s been almost a year since Schroders took over the trust from Woodford Investment Management, and we consider there to have been some positive improvements in that time. The managers have worked to restore shareholder confidence by addressing the issues of previous management but understand there is still a way to go.

One of the main changes is the oversight committee proposal. The managers recognised there had been failures of risk control previously and appointed the oversight committee to look at concentrated risks across the sectors they invest in and the size of their portfolio positions.

There won’t be much change in the mandate, as the managers will continue focusing on the same objectives - investing in both unquoted and listed UK companies aiming to achieve long-term growth for shareholders. But the long term changes they are making focus on the adjustment of exposure between public and private companies and greater balance of the sectors they invest in.

They’ll look to identify publicly listed companies with innovative business models, a focus on organic growth and high-quality management, and private equity investments which demonstrate a combination of fast growing, high quality companies with strong management teams and co-investors. The trust tends to invest in relatively few companies, meaning each one can have a significant impact on returns, but this increases risk.

The trust currently concentrates assets in the healthcare sector, making up over half of the portfolio. It has been a strong sector this year, but the managers want to gradually increase their exposure in other sectors including financials, industrials, technology and consumer goods. The managers don’t expect to be fully comfortable with the trust’s portfolio until the end of next year.

One of their top priorities is to pay down the trust’s debt, which has been reduced by roughly £7.2 million so far. They feel the trust is over-geared which is hurting the trust’s net asset value (NAV). Gearing, which means borrowing money to invest, could help boost returns when prices rise, but the reverse is also true, so it increases risk. The managers also have the flexibility to use derivatives, which if used will increase risk.

Culture

Part of the driving culture at Schroders is long term focus but also to align the objectives and aims with shareholder interests. Both managers personally own shares in the trust and a performance fee will only be paid if the trust’s NAV rises above 77p, the discount is narrowed over time and strong consideration is given to the share price. We feel this helps make sure the trust is run in a way that benefits all shareholders. As with all investment trusts, Schroder UK Public Private benefits from the additional oversight of an independent board of directors.

Cost

The ongoing annual charge over the trust’s financial year to 31 December 2020 was 0.43%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Performance

The trust has significantly underperformed the broader UK stock market since launching in April 2015, apart from 2017-2018 where it managed to outperform. The index below has been selected by Schroders as the most relevant to compare performance, however, the trust is invested differently from the index and there is no other index that is directly comparable. This means performance should be expected to look different from the index at times.

In recent years, the trust struggled due to exposure in a weak, unloved UK stock market and suffered massively with issues surrounding previous management. Since Creed and Wicks became the trust managers the trust has continued to underperform but the large gap of underperformance is beginning to narrow. Past performance is not a guide to future returns. At time of writing (6 January 2021) the trust is trading at a 31.11% discount to NAV compared to a 54% discount it had when they took over management of the trust.

The trust’s high proportion of healthcare and technology companies has been a strong driver of performance. Cancer treatment provider Rutherford Health and Benevolent AI (artificial intelligence), which uses AI for drug development and discovery, performed well due to an increase in demand for healthcare services. Similarly, the public company Autolus Therapeutics performed well as it has been largely unaffected by the virus and is financially strong.

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2020.

Find out more about Schroder UK Public Private Trust including charges

Schroder UK Public Private Trust Key investor information