STRATEGIC EQUITY CAPITAL: Despite the headwinds, this small cap trust has held up better than many of its rivals
It has not been an easy time for the manager of investment trust Strategic Equity Capital. Late last year, the £157million fund, investing in UK smaller companies, was subject to a takeover approach by a rival trust. Although rebuffed, the London Stock Exchange-listed fund has subsequently had to operate in extremely difficult market conditions – and it is unlikely that things will improve any time soon.
‘It’s clear market sentiment around UK equities is negative,’ admits Ken Wotton, manager of Strategic Equity Capital, ‘and that is especially the case with regards to UK smaller companies which are very much out of favour’.
He hopes that the new Prime Minister, announced tomorrow, will do their bit to bolster the economy and stave off recession, acting decisively to mitigate the adverse impact of rising energy bills on both households and small businesses. He draws confidence from the interventions of the Government in the early months of the pandemic which helped the economy pull through lockdown. Yet he accepts that difficult times lie ahead.
Despite the headwinds, the trust’s performance has held up better than many of its rivals. Over the past year, its overall losses of four per cent compare with an average for the UK smaller companies sector of 21 per cent. And while Wotton accepts the economy will shrink in the coming months, he is confident the trust’s portfolio will remain resilient – and could even be buoyed if some holdings attract interest from cash-rich overseas private equity houses looking to buy companies on the cheap.
In recent months, the trust has benefited from companies it holds being taken over: first, pharmaceutical company Clinigen by investment firm Triton Investment Management and then asset manager River & Mercantile by investment house consolidator AssetCo.
Wotton believes that irrespective of the economic backdrop, some of the trust’s top ten holdings will either be revalued upwards or taken over at attractive prices by private equity. If this is the case, it will be good news for shareholders.
Strategic Equity Capital’s approach is both focused and forensic. It currently only holds 18 companies with the ten biggest positions accounting for three quarters of the portfolio by value. Although it looks risky, Wotton says no stake is bought in a business until the team has put the company under the financial microscope. ‘It’s all about mitigating risk,’ he says.
It doesn’t end there. The trust then likes to engage with the companies it has an investment in – whether by providing support (for example, access to experts such as business consultants); helping build a better management team; or ensuring the financial interests of the company’s directors are aligned to those of Strategic Equity: namely, creating value for shareholders.
Among the top holdings are energy consultancy business Inspired and tenpin bowling company Ten Entertainment. Strategic Equity bought both companies in 2020 and although their share prices are down sharply this year (36 and 15 per cent respectively), Wotton is confident they will come up trumps.
‘We are the biggest shareholder at Inspired,’ he says. ‘It’s evolving as a business all the time and has expanded into providing ESG [environmental, social and governance] services for companies.’
Strategic Equity has annual charges totalling 1.07 per cent, the stock market identification code is BOBDCB2, and its ticker is SEC. Over the past five years, UK smaller trusts managed by JPMorgan and BlackRock have performed better, but have inferior one-year records.