North Atlantic Smaller Companies Investment Trust has announced its annual results for the year ended 31 January 2016. During the period, the company’s fully diluted NAV per share rose by 21.6% to an all-time high of 2,746p. This compares with a rise in the sterling adjusted Standard & Poor Composite Index of 2.8%, whilst the FTSE Small Cap Index, to which the Company says it has greater exposure, fell by 1.3% over the same period.
The manager say that the UK quoted portfolio benefitted from an excellent performance of MJ Gleeson Group, which rose by 64% during the year. Portfolio companies Innovation Group, Nationwide Accident Repair Services and Essenden were taken over although the manager says that the impact was partially offset by the weakness in Goals Soccer Centres following disappointing trading figures. However, new investments in OMG and Source Bioscience have reportedly performed well.
The manager says that the US quoted portfolio has had a mixed performance with the IPO and subsequent takeover bid of Avenue Financial and the takeover of Trust Atlantic Financial being partially offset by weakness in Ambac Financial Group following the potential bankruptcy of Puerto Rico.
For the UK unquoted portfolio, the manager says that there was considerable activity during the period. Industrial Properties repaid approximately £2.5m of the debt, Hampton Trust is in the process of liquidation. Trident Private Equity II was liquidated having achieved what the manager describes as exceptional performance and Trident Private Equity III has reportedly now returned in excess of the Company’s investment. The manager says that this indicates that this investment will also achieve exceptional returns for the Company. Team Rock was refinanced during the period supported by third party funding. Finally, Indoor Bowling was taken private since when operating results have been very significantly above business plan.
For the US Unquoted portfolio, the manager says that the investment in Celsis was sold at a significant premium to the January 2015 valuation following what the manager describes as a successful auction of the business. The manager say that the bank portfolio continues to add value to the Trust and that he believes there is further upside potential as the remaining holdings are sold. No new investments were made in the US during the year.
In terms of portfolio liquidity, the trust ended the year with £131m held in cash or short term Treasury Bills, most of which was held in US Dollars. The manager says that he would expect cash levels to rise further as private equity investments held in TPE III are liquidated and further corporate action in the quoted portfolio adds value to the Company. The manager believes that the trust is well placed to take full opportunity from any downturn in equity values over the next twelve months.
In terms of outlook, the board say that equity markets are currently experiencing a period of major uncertainty. In their view, the decline in the oil price has not only had a deleterious effect on the major energy producers, but their capital expenditure cuts have had a negative effect on overall economic activity worldwide. They comment that a similar contraction has been experienced in the mining sector and that these resource industries have accounted for more than 12% of global market dividends and other returns of capital in recent years. The board think that the current level of aggregate cash returns to equity investors is therefore unlikely to be sustainable, creating downside market risk. In their view, the US high yield market is facing considerable disruption with principal repayment risk now threatening a significant number of issues particularly in the resource sector.
The board also say that what they consider to be the Federal Reserve’s ambivalence on interest rates underpins the volatility in equity markets and keeps a lid on share prices. In their view, the monetization of debt is not likely to provide a lasting solution to the problems of unserviceable liabilities that triggered the 2007 financial crisis. Any substantial pick-up in real economic demand will drain liquidity from financial assets while economic stagnation will probably generate continued but increasingly ineffectual central bank liquidity injections. In either circumstance equity prices will face headwinds. The board also say that if the UK decides to leave the EU, that this would have little impact on the trust’s investments which they say are not substantially dependent on unfettered access to heavily regulated European markets. However, on a more optimistic note, the board say that value is now returning to smaller companies.
Strong performance from North Atlantic Smaller Companies – NAV rises 21.6%