Schroders Capital Global Innovation 16 June 2023

Schroders Capital Global Innovation Trust (INOV) has moved onto the next phase of its journey following a change to the investment policy. This has been marked with a name change from Schroder UK Public Private, as well as a change to the management team. Lead portfolio manager Tim Creed has now been joined by co-portfolio manager Harry Raikes. As a result of the change of policy, INOV will become a predominantly private equity vehicle, focussed on identifying long-term growth opportunities from a range of subsectors primarily within technology and healthcare industries and split across three sub-strategies: venture, growth, and life sciences (see Portfolio).

INOV remains on a wide Discount, though the board are taking steps to address this. Having completed their previous goal of reducing the trust’s gearing level, they have now made a commitment to utilising cash to conduct share buybacks, including using one quarter of any capital generated from the sale of legacy assets to buy shares back. On top of this, the board has introduced a continuation vote in 2025, and every subsequent five-year period, to offer investors the opportunity to wind up the trust should they wish.

The managers point to the independent valuation team having downgraded valuations of the trust’s holdings in order to factor in weakness in public equity markets which they believe may offer an effective ‘double discount’ on the trust (see Performance). The process of populating the portfolio with global, private companies with best-in-class offerings is underway which they believe marks the beginning of a new chapter for the trust.

We believe the new approach could offer the managers an opportunity to turn a corner with INOV. Whilst long-term past performance has been disappointing, there are now 13 new investments in the Portfolio that have been made by the Schroders Capital team meaning the future prospects are going to be more significantly influenced by their decisions and their management. This team have 25 years of experience investing in private markets and have a track record that includes early investment in the likes of Google, Facebook, and YouTube. We believe this background could provide investors with encouragement that they are capable of identifying the next winners and helping turn around the performance of the trust.

We believe that the narrative of the trust’s Performance has been very linked to its legacy. The trust, under its previous guise, has been affected by well-publicised issues which led to disappointing performance. It is arguable now though that the current discount reflects the sentiment this caused, and that this is pricing in more than the fundamentals of how the underlying portfolio has fared.

Furthermore, we believe the changes to the Discount policy, including a focus on narrowing the discount through share buybacks and the introduction of a continuation vote, may offer a level of defensiveness for investors. We believe this could provide a limit to the downside in the next couple of years as the opportunity to wind the trust up gets closer, though also offers some optionality should the strategy evolution begin to bear fruit.