Edinburgh Worldwide says that, for the 12 months ended 31 October 2023, its NAV decreased by 23.6% and share price by 27.7%. By contrast, the S&P Global Small Cap Index total return was -4.3% (in sterling terms).
The discount ranged between 6% and 23.6%, averaging 17%, and ended the period at 17.4%. Today, the discount is 14.7%. Over the course of the financial year, the company undertook 76 buybacks, buying back 5,190,382 shares for treasury. A further 1,710,933 shares have been bought back for treasury since the period end.
The net revenue return per share was a negative 0.65p per share and therefore no final dividend is being recommended.
The statement stresses that underlying operational performance within the portfolio has been strong, and the board has been reassured by robust balance sheets and good cash positions for the majority of the portfolio. It says that these companies are expected to perform strongly irrespective of macroeconomic conditions.
The manager is sticking by its portfolio too – turnover was very low at just 7.1% for the year.
The statement highlights positive performance from Exact Sciences, a provider of non-invasive molecular tests for early cancer detection; Axon Enterprises, a law enforcement equipment and software provider; and, Space Exploration Technologies (SpaceX), which designs, manufactures and launches advanced rockets and spacecraft.
Among those investments which contributed to the overall decline in NAV were: Novocure, a manufacturer of medical devices for cancer treatment; Alnylam Pharmaceuticals, a drug developer focused on harnessing gene silencing technology; and, Staar Surgical, which offers ophthalmic implants for vision correction.
As at the year end, the company held 14 private companies accounting for 26.0% of total assets (2022 – 20.1% of total assets in fourteen companies). No new private company investments were made during the year although follow-on investments were made in SHINE Technologies and Astranis Space Technologies, companies, which in the view of the managers show strong potential.
Board’s review of the manager – extract from the statement
Faced with this exceedingly difficult situation, as an independent Board, we have undertaken a thorough review challenging the Manager on the approach, philosophy and processes. One option would have been to recast the Company’s objectives and portfolio in order to bring performance closer to that of the Index. However, we feel that would be doing a disservice to the long-term objectives of our investors and risk replicating many other readily available portfolios with greater short-term certainty but lacking the outstanding long-term potential of the current portfolio. It would eliminate that which is unique and irreplicable in the Company’s approach, and at a time when the current sources of market dislocation have yet to fully wash through.
The portfolio is invested for the most part in companies with solid finances and good economics as well as outstanding future potential. The majority have been performing well operationally and have strong cash positions which means that they are able to self-fund without recourse to outside sources of additional capital. We continue to encourage the portfolio managers to focus on smaller entrepreneurial companies, as we believe these are better able to deploy the best in human ingenuity and imagination to embrace disruptive technologies and processes at scale than larger companies who are inevitably hidebound by legacy practices and business models and layers of bureaucracy and hierarchy.
Nevertheless, the portfolio managers, under close scrutiny of the Board, have identified potential improvements to both processes and tactics which should improve the balance of the portfolio. These include being more rigorous in recognising stocks that have had a good run and taking profits where appropriate, and being more ruthless in addressing issues in the tail of the portfolio where the portfolio managers may have tended in the past to err on the side of patience.
[QD comment: The period under review was an extension of last year’s perfect storm for the trust – rising interest rates turned investors away from growth stocks and made them more risk averse. Liquidity was prized – small caps lagged large caps in most markets, and funds holding unlisted assets moved to trade at discounts to NAV. Even the large cap indices were skewed by a narrow group of mega cap stocks. The good news is that things look to have changed towards the end of this period, with a growing sense that rates have peaked in the US and elsewhere.]
EWI : Edinburgh Worldwide results reflect difficult terrain