Fund Profile

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Downing Strategic Micro-Cap. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
DSM’s strong performance in January illustrates just how different it is…
Overview

Downing Strategic Micro-Cap (DSM) is a highly differentiated investment trust. The managers aim to benefit from valuation inefficiencies at the smallest end of the UK’s stock market and use the investment trust structure to access these opportunities without worrying too much about the illiquidity of the underlying investments.

DSM has a highly concentrated, high-conviction portfolio assembled by a truly active manager. Aside from the levels of research and due diligence that the team perform when selecting investments, their active approach can also involve them proactively engaging with the senior management or board in order to effect a catalyst to boost the valuation. DSM is by definition a ‘value’ investment strategy based on fundamental analysis, with a longer investment timeframe than most.

Performance since IPO has perhaps not been everything that the board and manager would have hoped. However, it is perhaps not surprising to have seen DSM underperform the more growthy AIC UK Smaller Companies peer group. Having a very different portfolio to the peer group means that DSM might be expected to deliver very different returns. This has been particularly evident this calendar year (2022), which has seen it outperform more growth focussed trusts by a considerable margin.

DSM’s discount widened dramatically during 2020. More recently, DSM’s board have been buying back shares regularly at wide discount levels. The latest share buyback was on 27/01/2022, which we estimate was at a discount of c. 19.1%. Combined with the manager’s estimated underlying discount that the portfolio trades at, DSM remains a truly ‘deep value’ opportunity.

Kepler View

The size of company that DSM invests in is significantly smaller than many institutional investors will contemplate. As such, DSM offers an idiosyncratic exposure to companies that are unlikely to be found in other funds or portfolios. It is perhaps unsurprising that during January, when the AIC UK Smaller Companies sector has stumbled thanks to inflation fears and rising interest rate expectations, DSM has performed well in absolute terms and on a relative basis, up by 3.3%% (Source: JPMorgan).

In our view, the stark outperformance of the peer group so far this year (2022) highlights how DSM does offer a differentiated return profile, which at certain times may add to diversification. The managers appear confident of the underlying recovery potential when the UK economy is finally able to shrug off COVID-19. A combination of a recovery in DSM’s companies earnings, and higher multiples if the market starts to rate them more highly, could be a powerful cocktail for shareholder returns.

At the same time, DSM trades on a wide discount to NAV, and the board are buying shares back. At current discount levels, DSM seems well-positioned for investors looking for a very differentiated and idiosyncratic exposure to the UK Small Cap space. DSM might be considered a classic value play, and so if current momentum continues, this discount might be expected to narrow. Nonetheless, we caution the discount has at points been wider during the recent past.

bull bear
Portfolio companies look to be in a strong position to capitalise on the UK economic recovery
Poor performance since IPO, illiquid nature of underlying companies and small size of the trust all mean that a narrowing of the discount is far from guaranteed over the short term
Highly differentiated strategy, with cash of 15% on the balance sheet giving the managers flexibility
Highly concentrated portfolio means that any pitfalls experienced by any investments could meaningfully impact NAV
Managers believe that portfolio companies trade well below their inherent values
Illiquidity of underlying investments means managers may have limited room to adjust portfolio
Continue to Portfolio

Fund History

10 May 2022 Results analysis: Downing Strategic Micro-Cap
DSM reports on a strong year in relative terms, which continues in 2022…
20 Apr 2022 On the hunt
We review discounts in the investment trust space against a backdrop of harsh conditions...
16 Feb 2022 Perfectly formed
Our research suggests that investment trusts really are a better way to gain exposure to smaller companies…
09 Feb 2022 Fund Analysis
DSM’s strong performance in January illustrates just how different it is…
03 Nov 2021 Don't fear the reaper
With market direction hard to call, we consider the case for taking a long-term view in the investment trust sector…
01 Nov 2021 Results analysis: Downing Strategic Micro-Cap
DSM’s interims illustrate continued progress, with insider buying from both manager and underlying companies...
14 Jul 2021 Grade inflation
We look at how our discounted opportunities portfolio has done in the first half of the year and update on the performance of our long-term rated funds…
08 Jul 2021 London Calling
UK equities represent a ‘once in a generation’ opportunity according to the managers who joined us at our event last week…
07 Jul 2021 Slides and Audio: Downing Strategic MicroCap
Download the presentation and listen to the audio from our 'Cool Britannia' Summer conference on 01 July...
07 Jul 2021 Slides and Audio: Roundtable - Small is beautiful
Download the presentation and listen to the audio from our second roundtable discussion with Dan Whitestone, Georgina Brittain and Judith MacKenzie...
25 Jun 2021 Fund Analysis
Insider buying and a positive outlook for the portfolio make DSM’s discount look attractive...
23 Jun 2021 Time to back Britain?
After a challenging period for the United Kingdom, we wonder if it could be the most exciting market on a five-year view…
09 Jun 2021 Cool Britannia?
Join the team at Kepler Trust Intelligence and six leading UK fund managers as we examine the prospects for UK equities with COVID in retreat and Brexit uncertainty finally behind us…
11 May 2021 Results analysis: Downing Strategic Micro-Cap
Reporting results for the year ending 28/02/2021, the momentum behind DSM’s portfolio continues…
14 Apr 2021 Wide Boys
We review our portfolio of chonky discounts as one star performer hits its target…
14 Jan 2021 Get 'em while they're hot!
We review the widest discounts in the investment trust universe and look at our selection of attractively cheap trusts…
25 Nov 2020 Britannia Redux
UK equities have been despised for almost five years and could offer extreme rebound potential…
11 Nov 2020 Now that's what I call a discount!
Presentations and audio from our conference focussed on discount opportunities in the investment trust sector…
11 Nov 2020 Slides and Audio: Downing Strategic Micro-Cap
View the presentation and listen to the audio from our 'Discounts in Focus' event on 05 November...
22 Oct 2020 Spotlight on discounts
As our event focussed on discounts approaches, we update our portfolio of discount opportunities and review discounts across the wider IT universe…
23 Sep 2020 Fund Analysis
DSM’s portfolio has proven resilient this year, but the trust’s discount remains very wide…
17 Sep 2020 Blood in the streets
The UK Smaller Companies Sector faces plenty of challenges, but bombed out valuations among trusts in the sector look interesting...
02 Jun 2020 A Buffett style margin for error?
Downing Strategic Micro-Cap has had to call for the tow truck for some of its holdings in the past, but we think the signs are that it is now well placed. Yet DSM trades on a historically wide discount to NAV...
06 May 2020 The fight in the dog
We look at the characteristics which have separated the winners from the losers among small-cap trusts in the current crisis, with some surprising results...
05 May 2020 Large vs small
Equity markets are pricing in continued large-cap outperformance. Will this continue?
04 May 2020 Fund Analysis
DSM is a highly concentrated micro-cap trust, on a ‘double discount’ of 69%...
20 Feb 2020 The return of the activist... but not as we know it.
Why the ‘20s will go down as the decade of the corporate activist...
View all

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