aerospace and defence bets pay off

Schroder UK Mid Cap Fund plc has delivered a buoyant set of annual results, posting strong gains in both net asset value and share price as its renewed strategic framework helped sharpen investor interest.

For the year to 30 September 2025, the trust reported a 10.8% NAV total return, outpacing the 6.7% rise in its benchmark, the FTSE 250 ex Investment Trusts Total Return Index. The share price performed even more robustly, rising 18% as the discount to NAV tightened steadily over the year.

The turnaround marks a confident first year for Harry Morley, who succeeded Robert Talbut as chair in February. “These excellent results underscore the enduring strengths of the UK mid-cap market and the benefits of a disciplined, high-conviction strategy led by experienced managers with a strong track record in stock selection,” Morley said.

The trust’s outperformance, delivered over one, three and ten years, comes against a complex market backdrop in which UK mid caps lagged large-cap peers for much of the period. While the FTSE 100 surged 17.5%, mid caps rose just 6.7%, hampered by global trade uncertainty and a late-year sell-off.

Yet the fund’s managers were quick to lean into areas of structural support, most notably industrials and, in particular, aerospace and defence, a sector that has enjoyed a re-rating amid rising geopolitical tensions and increased European defence spending.

The trust’s positions in Chemring [LON:CHG], Babcock International [LON:BAB] and QinetiQ [LON:QQ.] were among the standout performers, bolstered by long-term order visibility and renewed investor interest in defence technology. Other bright spots came from merger and acquisition activity: Spectris [LON:SXS] attracted competing private equity bids, ultimately agreeing to a near-100% premium offer from KKR, while retirement-income specialist Just Group [LON:JUST] secured a 75% premium takeover by Brookfield.

Not all holdings enjoyed smooth progress. 4imprint [LON:FOUR] detracted as US economic uncertainty and tariff anxieties weighed on sentiment, while online reviews group Trustpilot [LON:TRST] came under pressure despite solid trading. The fund’s lack of exposure to two Georgian banks that rallied significantly — Lion Finance [LON:BGEO] and TBC Bank [LON:TBCG] — also proved a relative drag.

Still, the trust was active in reshaping the portfolio, adding positions in Hill & Smith [LON:HILS] and Kier [LON:KIE], both geared to infrastructure spending, alongside new stakes in Frasers Group [LON:FRAS] and digital services provider Kainos [LON:KNOS], the latter boosted by the return of long-time chief executive Brendan Mooney.

Much of the year’s optimism stems from governance reforms announced in March. These included a management fee reduction, a newly introduced continuation vote to be held in 2028 and every three years thereafter, and a more assertive buyback policy. The board repurchased 269,000 shares during the year, with a further 406,500 bought back since, helping narrow the discount from 12.3% to 7%.

The fund also increased its dividend, declaring a total payout of 22.4p — a 4.2% rise and equivalent to a 3.4% yield based on the late-November share price. Net gearing eased to 4.8%, giving the managers capacity to take advantage of new opportunities in 2026.

With signs that international investors are rediscovering the UK equity market, particularly undervalued mid caps, the trust is positioning for another year of selective expansion. Investors will have the chance to hear from the managers directly at the fund’s annual presentation on 13 January.

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