Results analysis: Schroder British Opportunities

• Schroder British Opportunities (SBO) has released its interim management report for the six months to 30/09/2023. Over the period, the trust saw its NAV decrease by 2.5% on a total return basis.
• The trust has a combination of unquoted and publicly listed companies. At the end of the period, the portfolio consisted of nine private companies, totalling 65% of NAV and 23 public companies making up 27% of NAV.
• The private investments rose by an aggregate amount of 2.9% in the period, continuing the record of delivering a positive return in every quarter since the trust’s inception. The public equities segment fell by 4.9% due in part to a bias to small and medium-sized companies which were adversely affected by macro-economic conditions. This compares to a return of -0.5% for the FTSE All Share ex-100 ex-Investment Trust Index, though this is not a formal benchmark.
• A 6.9% rise in the share price in the period saw the discount narrow from 36% to 30%, despite a general widening across the investment trust space.
• Cash levels have risen to 10.5% from 9.8% at the beginning of the period following the exit of one position and the reduction of one other. Cash is reserved to take advantage of a pipeline of opportunities should they become available. There is no gearing.  
• Following the period post statement end to 01/12/2023, the trust saw a NAV rise of 4.7% driven mostly by a bounce back in the public equity holdings including some M&A activity.
• When discussing the private equities, Chairman Neil England said: “the companies we have invested in have generally shown robust revenue growth and continue to increase market share” and struck an optimistic outlook, noting: “the patient shareholder will benefit when market sentiment changes and the value and quality of the underlying portfolio becomes appreciated”.

Kepler View

Schroder British Opportunities (SBO) owns a blend of small and medium-sized private and public equities. We believe this approach affords the four-strong management team of Rory Bateman, Tim Creed, Uzo Ekwue and Peraveenan Sriharan the flexibility to identify and access the best growth potential, whether a company be quoted or unquoted.

In the six-month period covered by the report, the private segment of the portfolio has led performance, with an aggregate return of 2.9%. Four of the top five positive contributors were unquoted. The managers’ focus on the growth capital and buyout spaces of the sector has contributed to this, as most of the weakness in the market has been seen in the venture capital and pre-IPO areas. Valuations are determined by an independent team within Schroders, and uplifts have been driven by strong trading, similar transactional activity as well as the holdings demonstrating both strong organic and inorganic growth. These valuation gains have been partially offset by the independent team applying a multiple contraction to the portfolio which we understand reflects the lower valuations seen in public markets.

The public equity holdings have been a headwind to overall performance. We understand this is due to the portfolio’s smaller company bias being affected by macro conditions. We note that this has been an issue market wide, though since the period ended, SBO’s holdings have bounced back strongly, including seeing some M&A activity. We believe the macro headwinds have arguably eased in the past few weeks, as inflation appears to be falling sustainably, therefore leading to a consensus that interest rates have peaked. As such, the outlook for the subsector is looking brighter.

Portfolio activity in the period has been limited. Keywords Studios was sold due to concerns over the impact of artificial intelligence on its business model. The holding in City Pub Group (CPC) was trimmed following a strong period of performance. Post period end, CPC was subsequently bid for, leading to further gains and ultimately an exiting of the position.

Positive share price returns have led to a narrowing of SBO’s discount in the period. However, we believe there is plenty of potential at the current level as the discount remains notably wider than its average since inception. Furthermore, the current NAV already reflects the weakness in the public equities which make up a third of the portfolio, implying the private equities are being discounted even further. The managers highlight robust underlying performance of their holdings, as well as an encouraging improvement in market conditions post-statement period as reasons to be optimistic. If the broader outlook continues to improve, we believe the current discount may prove an attractive entry point for long-term investors.

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