Over the course of the 12 months ended 30 June 2022 the share price decreased by 9.5% on a total return basis, while the NAV total return – was negative 9.2%. In contrast, the FTSE Small Cap (ex Investment Trusts) Total Return Index fell by 14.6%. Thwe dividend was increased from 1.6p to 2.0p.
In the year to date up to 30 September 2022 the NAV decreased by 17.6% while the FTSE Small Cap Index fell by a much larger amount of 26.6%. This chairman feels that this is particularly encouraging as those sectors in which the company does not invest such as Oil & Gas, Mining and Banks were those which performed best during the year.
The chairman also notes that a volatile market environment can be a double edged sword for the company. On the one hand its portfolio companies face economic headwinds and a more uncertain outlook. On the other hand weaker share prices and the market’s tendency to over-discount shorter term issues and under appreciate the longer term prospects of fundamentally sound businesses can be a fertile hunting ground and plays to the strengths of the manager’s investment process.
It is also worth remembering that weaker equity markets, particularly in the area of UK Smaller Companies, have increasingly been attracting the attention of well funded private equity funds seeking to take advantage of the relative valuation discount being applied to publicly listed companies compared to prevailing private market transaction valuation multiples. Strategic Equity Capital has been a beneficiary of this, with takeover approaches for a number of companies over the past two years. During the period there were successful takeover offers for Clinigen, Proactis and Equiniti all from private equity buyers. River & Mercantile was also fully exited post period end to a trade consolidator.
Extract from the manager’s report
Clinigen, a specialist pharmaceutical services provider and the largest portfolio holding during the year, was the largest positive contributor during the period after receiving a takeover approach from European private equity firm Triton at a substantial premium to the undisturbed market price and delivering a full exit for the Fund. Wilmington, a professional media provider, delivered strong operational performance and upgraded financial forecasts benefitting from a substantial period of restructuring and a refocused strategy supported by the Gresham House team. River & Mercantile was also the recipient of a takeover approach from AssetCo, another listed asset management sector consolidator. It had previously sold its investment solutions and fiduciary management division to Schroders unlocking the value we believed was present in the sum of the constituent parts at the point of the Fund’s initial investment. Iomart, a datacentre and cloud services provider, is a recent smaller addition to the portfolio during the year and delivered results ahead of depressed market expectations following a protracted period of underperformance which drove a positive re-rating. Harworth, delivered results ahead of expectations and narrowed its valuation discount relative to the NAV of its asset portfolio after which we made a full exit from the position.
In challenging equity market conditions a number of the portfolio holdings suffered from share price weakness during the period, reversing the very positive trend during the prior year. The largest detractors included Tyman, a global supplier of building hardware which was de-rated on concerns about supply chain disruption and inflationary cost pressures despite delivering numbers in line with market expectations and demonstrating it has managed these issues effectively; Hyve, an events business was forced to exit its key Russian operations due to the Ukraine conflict; Inspired, an energy consultancy, was de-rated on negative sentiment due to the disruption to the UK energy market; Medica, a provider of outsourced teleradiology services was de-rated on no specific news which we used as an opportunity to increase the Fund’s position; and LSL Property Services, which de-rated on a weaker outlook for the UK housing market despite strong performance against its strategy to reposition the group as a financial services focussed business.
SEC : Strategic Equity Capital relatively resilient in UK market turmoil