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Strategic Equity Capital focused on discount narrowing

Strategic Equity Capital focused on discount narrowing

Strategic Equity Capital generated a return on NAV of 46.8% for the 12 months ended 30 June 2021 and a return to shareholders of 59.9% as its discount narrowed. The FTSE Small Cap ex Investment Trusts Index increased by 65.2%. The majority of the relative NAV underperformance was experienced over the final quarter of 2021, when the trust lagged the performance benchmark by 12.9% as cyclical and value-style stocks surged on the back of the good news about vaccines. These are not the sorts of stocks that the manager selects for Strategic Equity Capital’s portfolio. On a slightly longer-term view, which the board considers to be a truer measure of performance: over the three years ending 30 June 2021, the NAV total return was 11.0% on an annualised basis, against an annualised benchmark return of 9.8%.

The board continues its efforts to narrow the company’s discount. We have written about the two planned contingent tender offers in our last note on the company. In addition, the board has replaced the broker and the pr agency working on the trust. The manager, Gresham House, has bought shares in the trust and is working with Aberdeen Standard Investments to market it.

This year’s dividend is 1.6p, up from 1.25p last year (which was cut from 1.5p the year before).

Extract from the managers’ report

Over the course of the financial year we have made good progress with the transition of the portfolio: purchasing six new holdings (including one post period end) which represented 21% of NAV at the end of the period, fully exiting seven positions (including two post period end) which represented 26% of NAV at the start of the period, and adding to a number of core positions. At the end of the period the number of influential equity stakes where GHAM funds, in aggregate, hold a 5% or more equity stake now stands at nine, and represents 55% of the portfolio by value. A number of enhanced engagement initiatives are now underway with portfolio companies across a number of areas such as board composition, ESG strategy, long term management incentive plans and digital transformation activities.

Whilst a strong absolute NAV performance was delivered over the period, performance lagged the index. The majority of this relative drag was experienced during the exceptional market recovery during the last two months of 2020. This can partly be attributed to the net cash balance, which averaged 7% over the period and was a drag on relative performance. The larger factor however was the lack of exposure, due to the nature of the investment strategy, to the cyclical sectors which led the performance of the market as noted previously. By way of illustration, there was only one material negative contributor to performance (Clinigen; discussed in more detail subsequently); by and large the NAV underperformance relative to the index was driven more by what was not owned, rather than what was.

Tyman, a manufacturer of technical window and door components, saw its share price more than double as an improving trading outlook in their key US market drove upgrades whilst strong operational delivery supported margins and helped to reduce their leverageTribal, an educational software and services provider, rerated over the course of the period as a number of material new contracts were signed which evidenced increasing traction of their next generation ‘Tribal Edge’ platform. Medica, a teleradiology services provider, saw it shares recover over the course of 2021 as scanning activity in hospitals returned to more normalised levels. Wilmington, a B2B information and training provider, recovered as strong operational management and a shift to digital delivery channels saw it deliver a resilient performance despite Covid restrictions disrupting to face to face training. Ergomed, a clinical trials and pharmacovigilance specialist, continued its run of exceptional performance with significant upgrades and further M&A in the period; the holding was divested in the latter stages of 2020 due to the strength of the share price. 

Only three investments that delivered negative returns over the period.  Clinigen, a specialist pharmaceuticals a pharmaceutical services provider, was the only significant detractor over the period. The company issued two profit warnings over the period. The first, early in the period, was due to the launch of generic version of Clinigen’s Foscavir product in the EU; whilst this was expected the timing was a negative surprise and led to modest downgrades. The second, late in the period, was more significant and related to weak sales of oncology drugs, and in particular key product Proleukin, due to Covid-related disruption of cancer diagnosis and treatment pathways over the last 12 months. These developments are discussed in more detail on page 13 of the Annual Report. Holdings in 4Imprint, a US focused supplier of promotional merchandise, and Numis, a small and mid-cap investment bank, were both exited early in the period and prior to the recovery in markets. This was in spite of resilient trading and relatively robust share prices, as opportunities with a better risk vs reward balance were, in our opinion, available elsewhere.”

SEC : Strategic Equity Capital focused on discount narrowing

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