Josef Licsauer
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Updated 04 Oct 2024
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Schroders Capital Global Innovation. 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.

  • Schroders Capital Global Innovation (INOV) has released its interim results for the six months ending 30/06/2024. Over this period, its NAV total return decreased by 17.1%, whilst the share price total return fell by 18.8%, which compares to an average total return of -1.1% for the Morningstar Investment Trust Growth Capital sector. INOV’s discount widened from 42.1% to 43.3% over the period.
  • The trust’s public equity holdings had the most significant impact on NAV total returns, with Oxford Nanopore Technologies experiencing a 54.9% share price decline.
  • Performance also suffered in the first quarter due to OcuTerra Therapeutics’ phase II diabetic retinopathy trial failing to meet its endpoints, leading to the position being valued at zero. In the second quarter, Reaction Engines, known for its thermal management technology, was revalued downward after slower-than-expected revenue growth, indicating the need for further financing and additional time to become cash positive.
  • On the other hand, several positions performed well, including Atom Bank and Revolut, both unveiling strong results detailing good revenue and customer growth, as well as Bluewater Bio which announced a new upgrade to the North Sitra wastewater treatment works in the Kingdom of Bahrain valued at £33 million.
  • Total realisations amounted to £25.6m, including the sale of Carmot Therapeutics to Roche, the full exit of Immunocore, further sales of Oxford Nanopore Technologies, and the first milestone payment following the sale of Kymab to Sanofi.
  • Two new portfolio additions were made: Neurona Therapeutics, a clinical-stage biopharmaceutical firm focused on therapies for chronic neurological disorders, and a privately held AI company specialising in high-quality data curation services for generative AI models.
  • As of 30/06/2024, INOV held £4.8m in cash, £25.2m in money market funds and £14.8m in public equity investments. This will be utilised to meet the funding requirements of the existing portfolio, execute the buyback programme, and selectively target new investments in innovative venture, growth and life sciences companies.
  • Chair Tim Edwards commented, “Despite the difficult performance during the first half of the year, the Investment Manager continues to remain focused on executing the Company’s key priorities, which include rebalancing the portfolio and maximising sales proceeds from positions being exited, in order to create for shareholders a portfolio of attractive global companies with reasonable prospects of sustained growth over the long-term.”

Kepler View

The Schroders Capital Global Innovation (INOV) Chair acknowledged in the recent interim results that the trust has faced another challenging period with disappointing performance. However, the co-managers, Tim Creed and Harry Raikes, have remained focussed, closely monitoring progress across various investments in the portfolio and engaging with management teams to support strategic planning.

On this front, several companies demonstrated notable progress during the reported period. Atom Bank, for instance, posted 32% growth in net interest income and 575% growth in operating profit in its latest financial results. Revolut was another strong performer, unveiling 46% customer growth and a 95% increase in group revenue growth. However, some companies struggled in the tough market conditions. OcuTerra Therapeutics faced significant setbacks when its phase II diabetic retinopathy trial failed to meet its endpoints. On the public equity side, Oxford Nanopore Technologies saw its revenue growth and profitability fall below management expectations, then compounded by the renegotiation of a key customer contract, all leading to a 54.9% drop in its share price.  

Despite these challenges in the first half of the year, the managers have remained focussed on rebalancing the portfolio toward private equity. Over the six months to 30/06/2024, the managers realised around £35.6m, exiting public equity holdings in Immunocore and materially reducing the position in Oxford Nanopore Technologies. This shift has brought the portfolio’s private allocation to around 75% and it also includes a new purchase in a privately owned, high-quality AI company (the full name cannot be disclosed).

Both the board and managers are also mindful of the upcoming continuation vote in 2025 and have worked to maximise sale proceeds from exited positions, in order to shape a portfolio of global companies with stronger prospects of sustained long-term growth potential. One result of this effort has been increased liquidity, supporting the boards execution of its buyback programme, with £3.6m worth of shares being bought back since its announcement at the start of last year.

What we find encouraging is the managers’ commitment to the strategy’s core tenets, despite the challenges faced. They remain engaged with portfolio company management teams and when possible, continue to maximise potential exit opportunities, as demonstrated by the realisation total and activity reported in the interim results. They highlight that the growth and life sciences segment of the portfolio is performing well, though the public equity portion, principally Oxford Nanopore Technologies and Autolus Therapeutics, is expected to remain volatile due to the challenging valuation environment for loss-making listed companies.

If growth across the portfolio improves and recent changes prove effective, we think there is potential for INOV’s substantially wide discount to narrow. However, over the reported period, the managers note that given performance the discount widened out to 43.3%, despite the significant share buy backs, and we think challenging market conditions are likely to weigh on the discount in the near-term.

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