William Heathcoat Amory
View profile
Updated 16 Nov 2023
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.

  • Downing Strategic MicroCap (DSM) has released its half-year financial report for the period ending 31/08/2023. Over the six-month period, the trust saw its NAV decrease by 8.2% on a total return basis, which compares to a 12.8% decrease in the FTSE AIM All-Share Index in the same period.
  • M&A has continued to feature in the period, with two portfolio companies being taken out in the past six months which has contributed to returns. When these are combined with the companies undertaking strategic reviews, there is now over 20% of net portfolio assets with agreed bids or under review which should contribute to capital returns.
  • The managers have identified numerous potential catalysts which could improve the intrinsic value of the portfolio companies, such as companies undertaking strategic reviews, seeing an improvement in earnings and M&A.  
  • However, after a number of years of unrealised potential, and with investor appetite for micro cap stocks being low, the board has announced a planned wind down. A redemption option had been planned for May 2024, but the board have decided a journey towards a full redemption will be a better way of unlocking value in the trust. The first return to shareholders of at least 20% of the portfolio is expected to come in early 2024.
  • Chairman Hugh Aldous said, “Most of DSM’s portfolio is performing well and more is ripe for M&A or rerating”, but despite this ongoing uncertainty means he “has concluded that it would advantage all shareholders equally and fairly to commence a managed wind down of the company's investment portfolio in an orderly manner”.

Kepler View

Managers Judith Mackenzie and Nick Hawthorn have released, in our opinion, a bittersweet half-yearly annual report for Downing Strategic MicroCap (DSM). On the one hand, they have delivered another period of outperformance from their concentrated portfolio of companies at the smallest end of the market cap spectrum. However, they also acknowledge the ongoing headwinds towards the sector mean that the prospects for their holdings are unlikely to be fulfilled in the foreseeable future. As such, they believe shareholders will be best served by a winding up of the trust and a returning of capital to shareholders.

Judith and Nick highlight that two holdings received bids in the period and another has announced a strategic review. We understand these will likely make up the first capital repayment of c. 20%. Before the announcement, the shares traded at a 17.8% discount to NAV. We believe this approach of selling the ‘low-hanging fruit’ should offer investors a near-term boost of a well-defined capital return in the interim, at a price that is likely to be much closer to NAV than the shares currently trade at, with the potential for future returns as the wind down process continues.

The managers also highlight positive performance from a number of holdings. Examples include Volex plc which rose 44% in the period which benefitted the trust as the managers had recently added to the position. Similarly, Journeo rose c. 38% thanks to an acquisition DSM helped fund and a new director they appointed. We believe this demonstrates the potential in the portfolio which could contribute to further returns going forward, though clearly returns from this point on will be primarily led by exit values achieved.

Going forward, we believe this means the discount could be seen as attractive. While it will take some time to wind up the portfolio, and markets could move in the interim, there is the scope for periodic distributions at or near NAV. Furthermore, there is still potential for Judith and Nick to deliver value for shareholders through their active approach. We appreciate it may take some time to fully realise the value in the portfolio, as by the managers own admission, the UK remains out of favour and is therefore deeply undervalued, but this wind down approach could deliver strong returns if the managers achieve exits close to the current value in the NAV.

Press continue 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

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.
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.