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.
- Downing Strategic Micro-Cap (DSM) has reported its interim results for the six months to 31 August 2021, showing a continuation of the strong bounce-back from the pandemic induced market falls of 2020. The NAV per share on 31 August 2021 was 93.74p, an increase of 15.5% on the NAV per share on 28 February 2021 (81.16p) and an increase of 39.2% on the prior interim NAV per share of 31 August 2020 (67.36p).
- DSM has a concentrated portfolio of investments in small companies. They have been selected by the managers because they believe their prospects are materially undervalued, and in some cases, in need of some strategic involvement. The managers summarise their activities in this regard as “boards have been re-shaped, strategies re-focused and tough positions exited”.
- The manager’s report that they are not complacent, with inflation, interest rates, and supply chains all potential headwinds. They believe “inexpensive cash generative businesses of which this portfolio has plenty”, offer elements of defensive qualities. Having 12% of the NAV in cash (at the time of writing) “provides an opportunity to capitalise on market turbulence and any mispricing that tends to accompany market volatility”.
- The managers have been “unusually bullish” on the prospects for DSM since the start of 2021 (see investor letters on the DSM website). These letters illustrate the team’s progressive confidence in the portfolio, with phrases such as ‘coiled spring’ and ‘best ever prospects for the portfolio’ conveying some of their enthusiasm for the companies that DSM holds. The interims illustrate that the portfolio has made good progress and prospects are improving.
- Despite the sound performance by investee companies, and considerable uplift in NAV, the managers continue to believe that they stand at a considerable discount to intrinsic value. The team view their stocks as unreasonably overlooked, even though “each has a likely exit”. Downing believes their “worth should be realised nicely in time and they currently offer excellent value”.
- The board look to buy-back shares of the trust if the discount drifts out beyond par for a company like DSM. Hitherto par has considered to be broadly 12-15%, but the chairman states that the board hopes they will be able to get the discount to single figures in a healthy market.
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