Fund Profile

Downing Strategic Micro-Cap 25 June 2021


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.

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Downing Strategic Micro-Cap (DSM) aims to benefit from stock market valuation inefficiencies that exist amongst the UK’s smallest listed companies. This is an area of the market that offers the potential for significant value-add from a manager. DSM’s management team aim to identify catalysts for value to be crystalised, but if required they will engage with senior managements or boards in order to effect change that will be this catalyst.

DSM is by definition a ‘value’ investment strategy based on fundamental analysis and has a highly concentrated, high-conviction portfolio. However, the investment thesis envisages a longer time frame than most, at five to seven years. Investee companies will typically have a market capitalisation of below £150m at the point of investment, but are often much smaller. This size of company is significantly smaller than many institutional investors will contemplate, and as such DSM offers exposure to companies unlikely to be found in other funds or portfolios.

Performance since launch has not been as hoped, yet the managers believe there are clear signs that DSM’s shareholders have reason to be optimistic. Certainly, as we discuss in Portfolio, the prospects for each underlying company appear good and clearly aligned with the wider economic recovery in the UK. The performances of Volex and Real Good Food illustrate respectively the upside potential from the investment process and how the structured approach to investing can still deliver returns whilst exposing the trust to less equity risk.

The portfolio is concentrated but DSM’s strong balance sheet could provide comfort to investors. As we discuss in the Gearing section, DSM has cash of c. 17%. This gives the managers significant flexibility and should reduce DSM’s inherent volatility.

Analyst's View

DSM is very different from other equity funds. The managers are highly active, with very low levels of turnover in the portfolio and a degree of focus on investee businesses which is only usually seen in direct private equity trusts. However, in our view portfolio construction offsets some of the higher-risk characteristics that the concentrated portfolio has relative to traditional equity funds.

The team are now in year three of their investment time frame for a large part of their Portfolio, and this is intended to be the value-accretion phase. Part of DSM’s investment thesis is that at the small-cap end of the market, equity is not efficiently priced. Volex and Real Good Food provide illustrations of the team’s process at work, and also the UK economic recovery should prompt operational or M&A catalysts in the portfolio companies to further validate DSM’s investment proposition.

Downing estimates that the portfolio companies as a whole trade on a 40+% discount to their base case intrinsic value. Their assumptions are based on a conservative assessment of each businesses’ prospects over the long term. When combined with the trust’s current discount to NAV, we believe that value investors should find DSM an interesting prospective investment. DSM is a classic value play, and so if current momentum continues this discount might be expected to narrow. In our view, in terms of value opportunities, DSM is hard to beat. It seems Judith MacKenzie and the DSM team share this confidence, with their own recent purchases of shares in the trust echoed by the management teams of the underlying companies buying their own companies’ shares.

bull bear
Portfolio companies look to be in a strong position to capitalise on the UK economic recovery Poor performance so far, 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 17% on the balance sheet giving the managers flexibility Highly concentrated portfolio means that any pitfalls experienced by any investments could meaningfully impact NAV
Estimated 40+% look-through discount, reflecting the discount to the manager's base case intrinsic value, and a 14% discount to NAV Illiquidity of underlying investments means managers may have limited room to adjust portfolio
Continue to Portfolio

Fund History

16 Nov 2023 Results analysis: Downing Strategic Micro-Cap
DSM’s wind-down could unlock the value in its portfolio…
01 Nov 2023 Back to basics
Higher rates mean re-visiting portfolio construction...
17 Aug 2023 Investing in micro-caps with investment trusts
Micro-caps are a relatively new entry into the investment trust market…
26 Jul 2023 Our board and saviour
Boards are proving their value as discounts languish…
14 Jul 2023 Fund Analysis
DSM’s highly concentrated portfolio could benefit from a wave of M&A…
09 May 2023 Results analysis: Downing Strategic Micro-Cap
DSM has outperformed the AIM index again…
05 May 2023 Lessons from history
Previous crises suggest that small-caps are more recession-proof than we think…
19 Apr 2023 Are we nearly there yet?
We look at which trusts have done best year to date, and ask where there may be value…
30 Mar 2023 The little companies that could
DSM’s selection of some of the UK’s very smallest companies show remarkable resilience amid the economic doom and gloom…
24 Feb 2023 The overlooked value in the value universe
While markets have reawakened to the opportunity in value stocks, at the smaller end of the market capitalisation spectrum the managers of Downing Strategic Micro-Cap believe there is untapped potential…
16 Nov 2022 Fund Analysis
DSM’s discount remains an outlier, given recent NAV outperformance…
02 Nov 2022 Results analysis: Downing Strategic Micro-Cap
DSM held up better than many of its peers in a tough period for UK small caps…
28 Oct 2022 Will we see more M&A in the UK?
DSM may benefit if M&A buyers get active in the UK stock market…
30 Sep 2022 No money, mo problems
More gloom in the UK may provide opportunities for investors…
10 Aug 2022 Get ‘em while they’re hot
Wide discounts in the UK Smaller Companies sector may present long term investors with good entry opportunities…
20 Jul 2022 Ingredients for success
We identify several less conventional trusts that offer strong sources of diversification to major indices…
15 Jul 2022 Is it deep value’s time to shine?
DSM may deliver for those who are prepared to be patient…
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...
10 Mar 2022 What makes small, small?
Lots of funds purport to invest in small companies but DSM is the real deal…
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…
24 Jan 2022 Finding value in the microverse
Downing Strategic Micro-Cap offers value investors a unique approach to UK small caps…
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...
29 Sep 2021 In with the new
Identifying the “next big thing” in micro-cap investing is a challenge for private investors. Fortunately, the expert teams behind trusts such as Downing Strategic Micro-Cap are able to sift through the field to select the best new opportunities on the market…
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 for investors according to the managers who joined us to discuss the outlook at our event last week…
07 Jul 2021 Investing in tomorrow's big businesses
We examine the case for micro-cap investing, or investing in the UK’s smallest businesses, and explore how Downing Strategic Micro-Cap applies private equity-style investing to this area of the market…
07 Jul 2021 Slides and Audio: Downing Strategic Micro-Cap
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…
22 Jan 2021 Finding tomorrow's winners in the UK
With sentiment toward the UK improving, we see now as a fitting time to look at DSM and the exciting opportunities within the micro-cap focussed portfolio…
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 Five small cap trusts on very wide discounts
The UK Smaller Companies Sector is battered and bruised, but bombed out valuations among trusts in the sector look interesting...
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...
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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