Rights & Issues 07 May 2019
Disclaimer
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Rights & Issues (RIII) is a self-managed UK smaller companies trust. Simon Knott, the manager, has been at the helm for 35 years, and is a traditional buy and hold investor, with a value tilt. He runs the portfolio in a highly concentrated manner, with the top 10 holdings accounting for 87% of the portfolio.
Simon sits on the board and has substantial ‘skin in the game’, with £10m invested in the trust. His long tenure makes him one of the longest-serving fund managers in the country. Simon takes a low-turnover approach and tends to focus at the very bottom end of the market cap spectrum. His main aim is to buy companies with strong balance sheets, attractive dividend yields and are trading a discount to what he deems to the business’ intrinsic value.
Given the concentrated portfolio, the performance of the trust is heavily dependent on Simon’s skills as a stockpicker, but these have clearly shone through over the long-term as it has been the best performing member of the AIC UK Smaller Companies over 10 and 20 years to 23 April 2019.
Its returns and outperformance have been equally as strong over more recent time frames. Despite the rather difficult equity market conditions recently and its concentrated portfolio, RIII fell less far in the equity market sell-off of Q4 2018 and remains ahead of the Numis index as well as peers over 12 months. We attribute this to the value approach taken by the manager. The sell-off during Q4 most negatively affected the most highly rated growth stocks. Certainly RIII’s NAV has lagged peers since the start of the year, but overall, shareholders should be pleased with the result.
Despite the very strong NAV track record, the discount has been persistent. The newly tightened discount control mechanism (targeting a discount of 8%), provides reassurance to investors.
Having managed the portfolio for 35 years, Simon is nearing retirement age and (so far) we understand that there are no succession plans in place. We understand that the board has indicated that it is not its intention to liquidate the trust before mid-2021.
RIII is undeniably one of the investment trust’s hidden gems. Simon Knott’s portfolio management skills have stood the test of time, and whilst short-term performance has been relatively sedate, he continues to exhibit the characteristics that have delivered such strong long-term returns.
The trust’s newly tightened discount control mechanism will give existing shareholders some reassurance that a return to the old days of extremely wide discounts is unlikely (but not impossible). RIII is now trading in line with the average for the peer group, which many might view as unfair, given the decidedly unaverage track record. However, with mid-2021 only two years away (and a potential liquidation when Simon Knott retires), it might be hard for long-term investors to get too excited about the trust.
|
BULL |
BEAR |
| Extremely strong track record |
Highly concentrated portfolio |
| Pure stock-picking approach from a very experienced manager |
Manager is extremely shy of marketing and publicity, with commentary on portfolio non-existent |
| Discount to NAV, whilst not wide in absolute terms, is not representative of the manager / likelihood of the discount closing |
Unlikely to be a “long-term” investment, given lack of succession planning and manager approaching retirement age |
Fund History
