William Heathcoat Amory
View profile
Updated 10 May 2022
Save Article Download

Disclaimer

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.

  • Over the financial year to 28 February 2022, Downing Strategic Micro-Cap’s (DSM) NAV increased by 5.3%, versus the FTSE AIM All‐Share which was down 12% over the same period, representing significant outperformance over the period.
  • The DSM portfolio consists of “value stocks, dynamically managed with strong balance sheets, appropriate to the foreseeable economy and held at modest valuations”. This is a ‘value’ strategy, in that the portfolio constituent’s quoted prices are significantly below the value at which DSM’s managers place their achievable market value.
  • The board aims to manage the discount of shares to NAV, taking up loose stock where necessary, and the discount has averaged around 15% through the year. The board has announced that it plans to provide a significant redemption point on 31 May 2024, assuming no serious market disorder. That redemption will enable shareholders to redeem or have a matched sale for up to 50% of their holding. In the Chairman’s view, this should “encourage the market to improve its rating of the company’s shares as we move towards that redemption point”.
  • DSM’s chairman said “DSM has now achieved two years of distinctive performance. It deserves more market attention”. The manager states that they are currently “positive on the prospects for our holdings which are generally cheaper than the wider market, with stronger balance sheets and good growth prospects from the compelling products or services they provide”.

Kepler View

Downing Strategic Micro-Cap (DSM) is a highly differentiated strategy, and one that employs the advantages of the investment structure to enable it to provide a very different exposure for investors than would be found in many other smaller company trusts. As the manager eloquently summarises it, DSM “invests in small, unloved, and overlooked UK companies under £150m market capitalisations (at the time of investment). These are typically good businesses with a core asset or earnings quality which is unrecognised by the market”. As we note below, performance in the calendar year to date perhaps reflects a change in the fortunes of DSM, in being the only trust in the UK Smaller Companies sector to have increased its NAV.

During the year, there has been plenty of activity within the portfolio. The managers aim to use strategic catalysts to unlock value over a three‐to‐seven‐year investment horizon, and the managers note that evidence is mounting that “the strategic catalysts put in place are making a difference”. During the financial year, one of the most significant events was the partial repayment of Real Good Food loan notes which returned £6.0m across the holding period, generating an IRR on the returned investment of 11.3%, and de‐risking the investment, which was previously one of the largest exposures. DSM also participated in a fundraising for FireAngel, which has helped it to restructure – and is now demonstrating significantly improved gross margins. The team also helped to facilitate the refresh of the board at Digitalbox which the DSM team think positions the business strongly for the future.

Over the year, DSM invested in six new companies deploying £11.1m in cash, and follow on investments in five existing holdings, deploying £3.4m of cash. New investments that continue to be in the portfolio include National World, Centaur Media, Norman Broadbent, Tactus Limited, and one toehold where the team are still building a position. DSM exited in full from five positions, raising £6.8m in cash. At the period end the company had net cash of £3.8m, around 8.8% of net assets.

Performance since IPO has perhaps not been everything that the board and manager would have hoped. However, performance during the last financial year has been impressive, in a period which has seen the peer group struggle. At the time of writing, year to date DSM’s NAV is +4.6% (06/05/2022, source JPMorgan Cazenove) which is significantly ahead of the simple average of the UK Smaller Companies peer group which is down 16%, with some more growth trusts down more than 30%. This will be gratifying for shareholders, and in our view reflects the idiosyncratic exposure and deep value approach of the managers.

Despite this strong performance, DSM’s discount has widened from the average level during the last financial year, and is currently wider than20%. In our view, this offers clear attractions given the resilience shown so far this year during very difficult markets and the deep value characteristics of the underlying holdings. With the board now giving clarity on a redemption opportunity in 2024, over time this should focus minds on DSM representing a classic value play itself. If current NAV outperformance continues, the discount might be expected to narrow should the market, to paraphrase the Chairman, give the trust the recognition it deserves.

Login to read the full article...

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority.
Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority. To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.