Index of UK mid caps ‘Heineken index’

Heineken has been marketed for decades under the slogan ‘refreshes the parts other beers cannot reach’ and for Andy Brough, head of Schroders’ pan European small and mid-cap team, the FTSE 250 index is the ‘Heineken index’.

“You can’t stand still in this ever-changing world, because disruption is everywhere,” he said at Sub35’s Bonham, Edinburgh, event.

“Internally, we know the FTSE 250 as the Heineken index because it gets refreshed like no other index. Every quarter you’ve got companies leaving to go into the FTSE 100 and companies joining from the [FTSE] SmallCap. You’re already seeing what’s hot and what’s not.”

Growth Opportunities

The Schroder UK Mid Cap investment trust, which Brough runs alongside Jean Roche, owns a core of long-term growth opportunities. These tends to operate in areas where demand exceeds supply, giving them pricing power and driving organic growth.

He gives the example of SSP, the travel food and beverage provider which operates the Burger King, Starbucks, Upper Crust and YO! Sushi brands, and is benefiting from structural growth in air passenger numbers.

Other long-term growth opportunities in the portfolio are HomeServe, which owns householder repairs business Checkatrade, and pet supplies retailer Pets at Home, which is benefitting from a 25% increase in spending on pets over the past two years.

“Management has taken on Amazon, rebased the margin and turned it around,” said Brough. “This is what we’re trying to do – we’re trying to find companies that we can grow with, get them into the FTSE 100 and then sell them.”

A promotion to the FTSE 100 is an automatic sale for Brough. “Nine times out of 10 it works,” he said giving the example of Sports Direct which went into the FTSE 100 at £9 but has since been relegated and trades around £2.75.

The managers also tap into opportunistic ideas, which tend to operate in cyclical industries or areas where capacity is reducing.

Reasonable shape

Brough has never known a time when UK equities have been less popular. However, he said: “Even in the boring old UK you can find some pretty interesting companies.

“The UK is the fintech capital of the world – there are lots of businesses and lots of disruption coming down the pipeline.”

Contrary to negative headlines, Brough believes the UK economy is in “reasonable shape”. Real wage growth resumed in 2018 and more than one million jobs have been created since the EU referendum.

In 2018, the UK consumer spent £52 billion more than in 2017. “We’re just spending in different ways,” he said. “You’ve got to find out where consumers are spending and invest accordingly – try to track down these companies, buy them at the right price and grow with them.”

Five selling points

Schroder UK Mid Cap:

  1. Backs financially strong medium-sized companies across the UK economy
  2. Favour strong management willing to embrace disruption
  3. Owns a core of long-term opportunities
  4. Trades in and out of opportunistic ideas based on valuation
  5. Sells when companies reach FTSE 100

Watch Andy Brough’s presentation