Odyssean navigates crisis well

Odyssean beats Index since IPO

Odyssean navigates crisis well – Odyssean Investment Trust held up relatively well when the market collapsed in February and March. Over the year ended 31 March 2020, the trust returned -5.7% in NAV terms against -23.2% for the Numis Smaller Companies Index ex Investment Companies plus AIM Index.

The trust’s performance over the period was boosted by the takeover of Consort Medical.

One stock in the portfolio, Huntsworth, was taken over more recently. This converts 6% of the portfolio into cash. Half of the profits on that investment (equivalent to £1.1m) have been handed back to shareholders. The 2018 prospectus included a provision to make available 50% of any profits made following a corporate action to buy back shares, should the average discount exceed 5% over a 60-day period prior to exit. The discount narrowly exceeded 5% over this period. The board used the money to buy back shares.

The statement includes some comment on each of the 10 largest holdings, which we will not republish here. Instead we have reproduced sections of the manager’s outlook comment.

We have no strong view about whether the markets have already hit the bottom. It is also becoming clearer week-by-week that a snap back in earnings in 2021 to levels previously achieved in 2019 is increasingly unlikely.

Earnings forecasts are mostly irrelevant, with many companies withdrawing guidance. One chairman told us it was “just impossible” to give any sensible guidance….

….Whilst the near-term focus will be on crisis/cash management, at some point it will be appropriate to engage on how they capitalise on the opportunities that the crisis will present. In one example, a portfolio company which is a market leader, is the only one of its close peers still open for business. We would not be surprised if a number of its smaller, less well capitalised peers either do not re-open, or alternatively run out of cash when the market recovers. These types of situations offer scope for organic market share gains and/or bargain acquisition targets.

Over the next 6-12 months, we expect portfolio turnover to be higher than typical, as we will probably make more new investments than usual. We may also realise some of our existing holdings which, despite serving us well through the difficult recent months, offer a less compelling risk/reward balance than alternative investments that we can find in the market….

….We anticipate that there will be many companies seeking to raise new equity to repair their balance sheets, or position themselves to capitalise on the opportunities that the turmoil has caused. Currently there appears to be widespread investor support for these fundraisings, but this could wane if open-ended funds are subject to outflow requests, and managers use their cash balances up. We believe that there will be multiple attractive investment opportunities to recapitalise quoted UK small companies in the second half of 2020….

….We are fortunate to manage our investments via a closed-ended fund structure. This allows us high visibility on the existing assets under our control, to think and act for the long term and be less concerned by limited day-to-day liquidity of the shares of portfolio companies.”

[The last comment above has particular resonance for us. We think it is possible that closed-end funds are setting themselves up for another period of outperformance of open-ended funds.]

OIT : Odyssean navigates crisis well

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