Schroder British Opportunities 26 September 2023
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Schroder British Opportunities (SBO) owns a portfolio of companies across both public and private markets. The recently expanded four-strong Management team look for small and medium-sized companies with a market cap of £50m to £2bn. A typical company in the portfolio may offer growth potential through characteristics such as strong sales growth, good margins and free cash flow generation.
Performance has held up in the past 12 months, primarily due to valuation increases in the private equity element of the portfolio. This is a result of strong trading gains, aided by good underlying performance of their companies and supported by acquisitions. The team remain prudent regarding valuations though and have accounted for a weaker market backdrop by factoring multiple contraction into a number of holdings.
The Portfolio has seen some M&A activity, with three takeouts in the public equity sleeve in the past year. This has led to an increase in the cash level of the trust, which does not currently utilise Gearing, unlike many comparators in the private equity space. The cash has been partially redeployed in one new holding and to top up weaker quoted holdings. The managers are also monitoring an attractive pipeline of potential opportunities.
The managers believe that the recent underlying performance and positive corporate activity shows that the strategy is starting to build momentum. This has begun to be recognised in the share price, which has seen improved performance this year. However, the trust still trades at a wide Discount, likely due in part to negative sentiment towards the wider private equity sector. There will be a continuation vote in 2028, which the managers believe could act as a catalyst to help narrow the discount.
SBO stands out by offering access to a portfolio of some of the most attractive small and mid-sized growth companies from both public and private markets. This flexibility means the managers can invest in a range of opportunities, whatever stage they are at in their growth story. As such, we believe the portfolio is likely to offer a unique blend of opportunities that investors are unlikely to gain exposure to through similar vehicles (see Portfolio).
The current Discount of the trust means this unique portfolio is arguably available at a cheap valuation. The discount is almost one standard deviation wider than the average since inception, which may offer an attractive entry point. We believe the discount appears especially wide when considering that the weakness in the public equities, which make up one third of the portfolio, will already be priced into the NAV, inferring the discount on the private equities is even wider.
Despite a difficult market backdrop, especially in the small and mid-caps in which the managers specialise, we believe Performance may well have turned a corner. The discount, whilst wide, has stabilised and NAV performance has been resilient. This has been driven by the performance of the underlying portfolio, demonstrating real-world support for valuations. We believe this could indicate the recovery is starting to gather momentum, which could appeal to long-term investors.
- Resilient NAV performance through underlying performance of private equities
- Trust is trading on a wide discount, especially so when considering the public equity split
- Trust offers a potentially lower risk alternative to the private equity space due to lower use of gearing
- Concentrated portfolio means there is some single stock risk
- Higher cash levels could lead to a drag on performance in a rising market
- Trust levies a performance fee, which may decrease appeal to some investors