Fund Profile

Downing Strategic Micro-Cap 23 September 2020


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 Investment Trust (DSM) targets UK micro-cap companies which are trading significantly below their long-term value. The trust’s managers look to build a strategic equity stakes (between 3% and 25%), and engage with boards seeking change. If need be, the managers will take a more confrontational approach. All this takes time, and Downing invests on a five- to seven-year time frame.

DSM has a concentrated portfolio, meaning the NAV may be exposed to short-term disappointments. Some ‘lemons’ within the portfolio did sour early, which has meant that the NAV performance since IPO has been disappointing. Yet the team are confident that there are no more lemons and that, over the medium term, we should start to see the fruits of their investing labour be rewarded.

Although COVID-19 has put back expectations of some catalysts to drive the NAV, the other impact of the pandemic has been the discount widening dramatically (now standing at 24%). Taking into account the discount to the market that the underlying portfolio trades at, we estimate the ‘double discount’ is c. 54%. This suggests we are in ‘deep value’ territory.

Whilst the portfolio is concentrated, the balance sheet should give comfort to investors. Currently DSM has cash of 24%, and an investment in one company structured as a loan amounting to 18% of NAV. This cash gives the managers significant flexibility and should reduce DSM’s inherent volatility. We understand that, on a three-year view, the managers have confidence in all of the portfolio companies performing better in terms of underlying earnings and, in the absence of M&A, for this to be the main driver of returns.

Analyst's View

Applying private-equity style due diligence to companies with a market cap of below £150m means that DSM offers a very different investment thesis to most funds and trusts. Indeed, there may be no true comparator.

The managers have been making small adjustments to DSM’s portfolio – exiting two investments, and making two new investments (which have yet to be publicised). That said, the portfolio is dominated by a small number of companies, on whose fortunes DSM’s prospects largely rest.

NAV performance YTD has been reasonably good on a relative basis, with almost all holdings proving operationally resilient. The real damage has been the de-rating in DSM’s share price from a modest 2.1% discount at the end of February to a 24% discount at the time of writing.

In our view, there are potential catalysts on the horizon which could lead to the discount narrowing. The team are now in year three of their investment time frame for a large part of their portfolio, and any corporate activity for investee companies might contribute strongly to NAV progress and validate the investment proposition. Alternatively, if the loan owed to DSM were to be fully or partially repaid , this could act as a catalyst for the discount to narrow if a more sustained buyback programme from the board (see Discount) was anticipated.

In terms of value opportunities, DSM is hard to beat on a double discount we estimate to be c. 54%. Certainly, there may be bumps on the horizon, but this could be an interesting entry point seemingly at a moment of maximum pessimism for the trust.

bull bear
Estimated 54% look-through discount, reflecting lowly rated underlying companies and a 24% discount to NAV
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 24% on the balance sheet
Highly concentrated portfolio means that any pitfalls experienced by any investments could meaningfully impact NAV
Clear catalysts identifiable for a re-rating
Illiquidity of underlying investments means managers have limited room to adjust portfolio (should they want to)
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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