Rights & Issues 07 May 2019
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
Rights & Issues (RIII) is a self-managed UK smaller companies trust. Simon Knott, the manager, has been at the helm for 35 years, and is a traditional buy and hold investor, with a value tilt. He runs the portfolio in a highly concentrated manner, with the top 10 holdings accounting for 87% of the portfolio.
Simon sits on the board and has substantial ‘skin in the game’, with £10m invested in the trust. His long tenure makes him one of the longest-serving fund managers in the country. Simon takes a low-turnover approach and tends to focus at the very bottom end of the market cap spectrum. His main aim is to buy companies with strong balance sheets, attractive dividend yields and are trading a discount to what he deems to the business’ intrinsic value.
Given the concentrated portfolio, the performance of the trust is heavily dependent on Simon’s skills as a stockpicker, but these have clearly shone through over the long-term as it has been the best performing member of the AIC UK Smaller Companies over 10 and 20 years to 23 April 2019.
Its returns and outperformance have been equally as strong over more recent time frames. Despite the rather difficult equity market conditions recently and its concentrated portfolio, RIII fell less far in the equity market sell-off of Q4 2018 and remains ahead of the Numis index as well as peers over 12 months. We attribute this to the value approach taken by the manager. The sell-off during Q4 most negatively affected the most highly rated growth stocks. Certainly RIII’s NAV has lagged peers since the start of the year, but overall, shareholders should be pleased with the result.
Despite the very strong NAV track record, the discount has been persistent. The newly tightened discount control mechanism (targeting a discount of 8%), provides reassurance to investors.
Having managed the portfolio for 35 years, Simon is nearing retirement age and (so far) we understand that there are no succession plans in place. We understand that the board has indicated that it is not its intention to liquidate the trust before mid-2021.