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Investment Trust Watch: Strategic Equity's big discount

10 February 2017

Fund manager Stuart Widdowson's shock departure has left Strategic Equity Capital on a cheap discount. Is there a buying opportunity? 

Shares in Strategic Equity Capital (SEC) dropped 6% this week after manager Stuart Widdowson announced he was leaving GVQ Investment Management to set up on his own and that his deputy Jeff Harris would take charge.

The shock news saw the discount on the previously top-performing smaller companies investment trust expand from 8% to 15.3% by yesterday’s close, its widest in over three years.

That gives the £136 million fund, which is classified as an activist investor for its policy of engaging with the managements of companies it invests in, a Z-score of -2.3. This makes it the third cheapest trust in our weekly table from Numis Securities (see below).

Just to recap, a Z-score is a measure used by analysts to show how far an investment is trading beyond its 12-month average range. Roughly speaking, a Z-score of -2 or below is regarded as ‘cheap’, and a potential buying opportunity, while a Z-score of 2 or more is viewed as expensive and may be a sign to take profits.

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
F&C Capital & Income (FCI) -2.5 0.6 -2.5
CATCo Reinsurance Opportunities C (CATC) -6.1 0.1 -2.4
Strategic Equity Capital (SEC) -15.3 -7.0 -2.3
Drum Income Plus REIT (DRIP) 5.1 11.2 -2.2
Qannas Investments (QIL) -4.1 0.2 -1.9
F&C High Income - B Shares (FHIB) -7.3 -6.7 -1.7
Perpetual Income & Growth (PLI) -9.5 -6.0 -1.7
F&C High Income - A Shares (FHI) -7.3 -6.7 -1.7
JPMorgan Mid Cap (JMF) -12.2 -6.9 -1.6
F&C High Income- Units (FHIU) -7.7 -7.0 -1.6
BlackRock Latin American (BRLA) -15.9 -13.6 -1.5
Edinburgh IT (EDIN) -4.8 -2.4 -1.4
Henderson High Income (HHI) -1.0 1.0 -1.4
Schroder European Real Estate (SERE) -4.5 4.3 -1.3
Investment Company (INV) -6.5 -2.3 -1.3

Source: Numis Securities 9/2/17

'Natural successor'

Whether SEC is a buying opportunity depends on your view on the new manager. Harris, a former analyst, joined GVQ in 2012 and was promoted to assistant fund manager on SEC alongside Widdowson less than three years ago after the firm was rocked by the departures of chief executive Adam Steiner and chairman Jonathan Morgan.

According to Harris’ Linkedin page he graduated with a first class Politics degree from Birmingham university in 2006. He cut his teeth at PricewaterhouseCoopers where he worked for four years doing due diligence on private equity and other corporate transactions.

GVQ is led by Jamie Seaton, a Citywire A-rated fund manager, and is owned by Lord Rothschild’s RIT Capital Partners (RCP), which has a 14% stake in SEC.

There had been speculation that SEC’s board could follow Widdowson to the new fund management company he is setting up with Chris Mills of Harwood Capital and manager of the North Atlantic Smaller Companies (NAS) and Oryx International Growth (OIG) smaller company trusts.

Richard Hills, the trust’s chairman, quashed that today, using half-year results to proclaim the board’s belief that Harris was Widdowson’s natural successor having been ‘heavily involved’ in the construction and management of the portfolio since 2014.

‘Our new lead manager, Jeff Harris, is well acquainted with all the investments held in our portfolio and has earned his position through his major contribution to the company over a period of several years. We are confident that Jeff will enable the company to continue delivering strong performance, which should be reflected in a narrowing of the discount in due course,’ Hills said.

That lifted the share price 1% to 200.2p but on a 16% discount to NAV, according to the Morningstar website.

'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Better Capital 2012 (BC12) -44.9 -65.0 3.3
Prospect Japan (PJF) -8.2 -26.2 3.2
Eurocastle Investment (ECT) 7.5 -13.2 3.1
CVC Credit Partners Euro Opps - Euro (CCPE)  CVC Credit Partners EUR (Ordinary Share) 0.9 -2.5 2.9
UK Mortgages (UKML) 9.4 3.7 2.8
Schroder Japan Growth (SJG) -4.6 -10.7 2.7
Tiso BlackStar Group (TBGR) -19.5 -44.6 2.7
Polar Capital Global Financials (PCFT) -1.6 -9.8 2.7
HBM Healthcare Investments (HBMN) -21.9 -28.8 2.5
EF Realisation Company (EFR) -30.3 -48.5 2.5
Global Resources (GRIT) -44.9 -72.8 2.5
JPMorgan US Smaller Cos (JUSC) 1.1 -9.9 2.4
Apax Global Alpha (APAX) -6.7 -16.2 2.4
Ratos AB B (RATOB) 71.4 35.5 2.4
Scottish IT (SCIN) -8.3 -11.4 2.3

Source: Numis Securities 9/2/17

Back to buybacks

Hills also committed the board to resuming share buy-backs and tender offers to ensure the discount doesn’t widen further. The trust last bought back 50,000 shares in November at a 12% discount, he said.

A re-rating of the SEC shares may also depend on what happens to the 4.8% stake held by Ian Armitage, the private equity veteran who gave Widdowson his first job at HgCapital (HGT). In a further dash of intrigue, it was announced that Armitage will chair Widdowson’s new company.

All UK smaller company trusts had a difficult 2016 but today’s interim results are a reminder that SEC suffered from its policy of shunning investments in volatile, commodity-based companies. It therefore derived no benefit from the rally in small cap mining and exploration stocks that occurred last year.

From the end of 2015 the share price moved from a 5% premium above net asset value (NAV) to a 13% discount below NAV after the Brexit vote in June.

The six months to 31 December saw SEC bounce back with just one of its 17 investments falling in value and the portfolio enjoying a total return of just over 14%, less than the 18% gain in the FTSE Small Cap index, but helped by a bid for its longstanding holding in E2V Technologies. Investors got slightly less than the NAV return as the share price lagged and the discount widened.

Over five years the trust has generated a total shareholder return of 148.8%, ahead of the 136.5% average of its sector and ranking it sixth out of 15 rivals, according to the Association of Investment Companies.

Investment company news brought to you by Citywire Financial Publishers Limited.

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