Gresham House Strategic’s discount narrows over interim period – The UK smaller companies-focused, private equity style fund, Gresham House Strategic (GHS), published interim results covering the six months to 30 September 2019, this morning.
- NAV total return of +0.3% vs +0.2% by the FTSE small cap index (total return basis). GHS say the NAV was up a further +5.8% over the post-period end to 15 November 2019;
- The shares rose by 10.3% over the period;
- GHS’s discount narrowed from (22.9%) to (14.4%).
Post-period end highlights:
- Share price rising a further +11.7%, with discount narrowing to (9.8%);
- Strong performance from Augean in particular, has helped grow NAV; NAV per share rising +5.8%.
Uncertainty has left businesses in limbo
The following market commentary is provided by GHS’s managers, Graham Bird and Richard Staveley:
“It has been a turbulent six months for UK equity markets facing both domestic and global headwinds, with continued and increasing political uncertainty in the UK, exacerbated by negative headlines emanating from the Woodford saga with a global economic backdrop of concerns over trade-wars and potential economic slowdown.
1. Increasing political uncertainty
The initial Brexit delay from March 2019 to October 2019 was designed to avoid the uncertainty of a no-deal and give parliament time to produce a co-ordinated outcome for the country. However, rather than stabilise the situation, the summer has ended up providing a marked increase in political and economic uncertainty. We have witnessed a change of Prime Minister, Supreme Court rulings, a revised but rejected Brexit deal and now a snap general election. The lack of clarity on the outcome of these processes makes it difficult for both investors and operating companies to make investment decisions. This has been a key ingredient to the state of paralysis that both the UK economy and markets currently find themselves in. Given the context of all-time highs in US equities, global asset-allocators have continued to reduce UK equities exposure to very low levels vs history.
2. The fall-out from the Woodford saga
The UK fund management industry was dominated by one story over the summer: the fallout from the crisis at Woodford Investment Management. Whilst we do not need to regurgitate the story here, the collapse of one of the UK’s most renowned investment managers did little to help investor confidence in UK equities or their managers, in particular at the smaller, less liquid end of the market. We reiterate the points made in the chairman’s statement that our structure and extensive due diligence process leaves us well-positioned for any regulatory response. We would make it very clear that our ‘value’ conscious approach to investment and our bias towards proven, cash generative business models results in most of the ‘small’ and early-stage, often unprofitable, companies typically held by Woodford not meeting our strategy criteria or style.
These two factors drove accelerating outflows from UK SMID funds over the summer at the fastest rate for five years, putting pressure on valuations (as funds sold to meet redemptions) and at the same time drying up liquidity and buying interest. This allowed equities to drift down further indiscriminately on ‘no news’. As a result, small-caps (the most illiquid of equities) have de-rated against their larger peers.
3. The global backdrop
The global backdrop to UK specific issues has been souring economic data – especially industrial. As the comments in the Q2 Factsheet on the gold to copper ratio suggested, both domestic and international economic indicators have declined into the autumn and the drivers of these are multi-faceted. The US faces the ongoing uncertainty of an unsettled trade war and growing impacts of tariffs which are now starting to have a real impact. It looks increasingly as if the US presidential race next year will be another divisive battle, with Trump likely to face an equally polarising candidate from the Democrat party. The other engine of the global economy, China, also impacted by the trade war, has already been slowing down as the gradual transformation of their economy, from being dependent on infrastructure build and high levels of credit support evolves. The Eurozone, beset by long-term structural issues, is also struggling as Germany’s strong export base finds weaker end-market conditions: “Germany’s central bank warning the country’s economy may have shrunk for its second consecutive three-month period” in October 2019[6]. Significant monetary policy support looks increasingly like ‘business as usual’ rather than temporary. The International Monetary Fund (IMF) has cut its global growth forecast by 0.3% in the last six months and now expects global growth to fall to 3% in 2019, its slowest rate since the Global Financial Crisis. The common theme here is that near-term visibility is worsening, making it more difficult for companies to make decisions. The inversion of the yield curve, a regular, if not early and approximate indicator of near-term recessionary conditions, certainly highlights bond market positioning given this economic backdrop.
The UK and global issues described in this report have, of course, impacted company earnings and we are on track for the weakest year of the current bull market for UK corporate earnings. The number of profit warnings we flagged in the Q3 factsheet has worsened; UK companies have now issued 235 warnings in the first nine months of 2019, the highest third-quarter sub-total since 2008 and the EY profit warning stress index is at a score of 96, a level not seen since the first quarter of 2009.
A protracted period of domestic and global uncertainty is affecting decision making and demand in UK businesses and households – as reflected in the 30% of UK profit warnings, citing delayed or cancelled contracts. As a result, companies and markets alike have had a difficult six months. The sharp rise in profit warnings citing accounting issues is a further worrying sign and a signal that the economy is cooling. This compares with a previous average of 3%. It is worth considering that these sorts of problems often come to the fore at times of increasing economic stress, with the current peak exceeding the previous high of 9% of accounting-related warnings issued in 2007. Many of the issues described here are on-going and will run into 2020, underlining our belief in the need for cautious analysis of investment opportunities focusing on value, underpinned by fundamentals, downside scenario testing, cash generation, strength of balance sheets and a cynical eye on the promise of above average growth by small company management teams.”
GHS: Gresham House Strategic’s discount narrows over interim period