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Investment Trust Watch: Downing gets off to a flyer

19 May 2017

Shares in Downing Strategic Micro-Cap soar to a premium, but it's a different story for fellow small company investor Gresham House Strategic.

Downing Strategic Micro-Cap (DSM) has got off to a strong start, with shares racing to a premium as investors back Citywire AA-rated Judith MacKenzie to replicate the success of her open-ended fund with her first investment trust.

Shares in the 'micro-cap' investment trust are trading at 108.6p, a 9.6% premium to net asset value, which Numis estimates at 99.1p, up slightly from 98p at its launch on Tuesday last week.

Downing had looked to raise up to £100 million in the placing of its first investment trust. Although demand wasn't as high as that, the £54 million it did gather was comfortably ahead of the £35 million minimum target, at a time when equity raisings have struggled compared to those for alternative asset trusts.

Investors have been encouraged by the success MacKenzie has enjoyed with her Downing UK Micro-Cap Growth open-ended fund, run with a similar strategy to the new trust, and is among the top 10 UK smaller company funds over the last five years with a 134.4% return.

None more so than John Spiers, who outlined his reasons for backing the trust on these pages earlier this month and whose wealth management group EQ Investors has emerged as the largest shareholder in the trust, holding 11.5% of the shares.

Shares in the trust certainly look expensive compared to its rivals in the UK Smaller Company sector, even if its lack of a track record means it is not yet registering on the Z-score rankings. The Downing trust is by far the best rated as the only whose shares trade on a premium, with the average trust on a discount of 11.9%.

But it's worth noting that 'micro cap' trusts, investing in the smallest of small companies, have tended to enjoy stronger ratings. Shares in River & Mercantile Micro Cap (RMMC), whose explosive performance we highlighted earlier this month, are trading at par, while Miton UK Microcap (MINI) is changing hands at just 2.5% below net asset value.

And while Strategic Equity Capital (SEC), which shares with Downing an aim of using private equity techniques to invest in public markets, languishes on a 14.8% discount following the departure of manager Stuart Widdowson, less than two years ago it was on a 10% premium.

Conspicuous by its failure to have enjoyed a similar rating is Gresham House Strategic (GHS), the investment trust taken over by Gresham House Asset Management (GHAM) in 2015.

GHAM was founded by Tony Dalwood, who used to work at GVQ Investment Management, which runs Strategic Equity Capital, and Gresham House Strategic adopts a similar approach.

But despite efforts to spur investor enthusiasm, such as the launch of a maiden dividend and a share buyback programme, the discount on the shares has remained stubbornly high, with the trust appearing in the 'cheap' list this week. Trading 27.7% below net asset value, the shares have a Z-score of -1.6.

Just to recap a Z-score is a measure used by analysts to indicate whether a trust’s valuation is outside its normal range. Roughly speaking a Z-score of 2 or more is considered ‘dear’ while a score of -2 or below is getting cheap.

'Cheap' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
Damille Investments II (DIL2) -28.4 -13.3 -3.3
Ranger Direct Lending (RDL) -24.0 -11.5 -2.8
NAXS Nordic Access Buyout (NAXS) -16.8 -9.9 -2.3
Juridica Investments (JIL) -50.0 -24.1 -2.2
Qannas Investments (QIL) -6.4 -1.8 -2.1
TOC Property Backed Lending (PBLT) 2.4 4.9 -2.0
Aurelius Equity Opportunities (AR4) 3.0 31.9 -1.9
Drum Income Plus REIT (DRIP) -0.2 8.5 -1.9
Woodford Patient Capital (WPCT) -8.1 -2.3 -1.9
GLI Finance (GLIF) -51.3 -39.1 -1.9
EP Global Opportunities (EPG) -6.8 -4.8 -1.8
Gresham House Strategic (GHS) -27.7 -24.1 -1.6
BlackRock North American Income (BRNA) -8.3 -4.6 -1.5
Myanmar Investments (MIL) 40.4 51.8 -1.5
Ashmore Global Opportunities - US$ (AGOU) -35.3 -29.5 -1.5

Source: Numis 18/5/17

While Gresham House Strategic's net asset value has grown 19.8% so far this year, the shares are up just half that as the discount has widened.

The trust's charges are likely to play a big part in that. The heavy discount inflates even the base fee, paid as a proportion of net asset value, while the trust's small size, at a market value of just £31 million, means additional costs are more punitive.

Then there's the performance fee, which is set at 15% of any returns above 7% a year. All of which contributes to an ongoing fee, including performance charges, at an eye-watering 10.5%.

If that's not enough to put off investors, the portfolio is heavily skewed towards the fortunes of digital communications group Imimobile (IMOI).

Gresham House has been reducing the size of this position, a legacy of the trust's former incarnation as technology incubator Spark Ventures.

Having inherited a position that made up 79% of the portfolio they inherited, the managers have brought it down to 37.6%, but that level of concentration is still likely to put off many investors. 

'Expensive' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
BlackRock Emerging Europe (BEEP) -6.8 -11.5 3.3
Phaunos Timber (PTF) -9.7 -19.9 3.2
Montanaro European Smaller Companies (MTE) -9.4 -16.2 3.0
Target Healthcare REIT (THRL) 18.8 11.3 2.9
Kubera Cross-Border (KUBC) -30.9 -59.2 2.8
Electra Private Equity (ELTA) -6.4 -51.0 2.7
Cambium Global Timberland (TREE) -52.8 -67.5 2.6
F&C Private Equity (FPEO) 4.8 -10.0 2.6
Mithras IT (MTH) -1.9 -11.2 2.5
Miton Global Opportunities (MIGO) -0.9 -6.5 2.4
Impact Healthcare REIT (IHR) 8.2 6.0 2.3
JPMorgan Global Convertibles Income (JGCI) -3.7 -7.8 2.3
GCP Asset Backed Income C (GABC) 5.0 3.9 2.2
Fidelity European Values (FEV) -7.6 -12.2 2.2
Princess Private Equity (PEY) -3.0 -15.4 2.2

Source: Numis 18/5/17

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