North Atlantic Smaller Companies (NAS) has published its annual results for the year ended 31 January 2024, during which its NAV increased by 3%. Its chairman, Sir Charles Wake, points out that this “compares unfavourably with the Sterling adjusted Standard & Poors index but [is] a good outperformance of appropriate United Kingdom indices where the majority of the trust’s quoted assets are invested”. NAS’s revenue account for the period showed a surplus post taxation of £12.2m (2023: £4m) and an interim dividend of 68.5p has been declared in respect of the year ending January 2024 (2023: 22p). As usual, no final dividend is proposed.
Share repurchase activity
During the last financial year, 140,493 shares (2023: 58,932) were acquired at a substantial discount to the net asset value, and this policy has continued into the current financial year. Wake points out that this benefits all long-term shareholders by creating an immediate uplift in the net asset value. At the forthcoming AGM shareholders will, as usual, be asked to support a Rule 9 waiver that will allow NAS to continue to repurchase shares without requiring its chief executive, Christopher Mills, and persons and companies presumed to be acting in concert with him, to make a mandatory offer under Rule 9 of The Takeover Code for the company. Wake says that, although 12.85% of the shareholders voted against this resolution at the last AGM, the board will continue to give shareholders the opportunity to vote on this resolution as long as it believes that the majority of shareholders who are able to vote will continue to support the resolution at forthcoming AGMs.
A lack of enthusiasm for British equities
In NAS’s last annual report, Wake stated his expectation that interest rates would go higher and stay higher than was generally expected. He says that this has proven to be the case as, although inflation has come down, it remains a continuing concern for central banks. Commodity prices, and in particular energy prices, are falling back but wage inflation remains stubbornly high, not least in the United Kingdom where the rapid increase in the minimum wage is driving increases across the spectrum. Corporate profits, particularly in the United Kingdom, have been disappointing with a near record number of warnings over the past twelve months. Wake says that companies that perform in line, or even better, get little recognition in their share price whilst downgrades can lead to very substantial falls. Enthusiasm for British equities continues to evaporate, with retail outflows amounting to £24bn over the past two years and £46bn over the past eight years. Wake says that pension funds and institutional investors have shown only marginally greater enthusiasm for UK equities, although the British government is now actively seeking ways to stimulate the market. However, he has little confidence that any moves by the government will have anything more than at best a short term impact.
Conservative strategy
Against this background, NAS’s managers have continued to adopt a conservative investment strategy with cash and US treasury bills at the end of January amounting to £70m. However, Wake says that there is no doubt that as many managers with open ended funds become forced sellers, opportunities will arise to make attractive investments.
Investment manager’s report
Quoted portfolio UK
“Despite a number of headwinds, not least of all continued retail and institutional selling of UK equities and a very significant record number of profit warnings, the UK portfolio taken as a whole performed well and outperformed relative to relevant indices.
“Takeovers have been the key to success and it is therefore not surprising that two of our best investments during the period were Ten Entertainment up 40% and Sureserve also up nearly 40% both of which were acquired during the period. Oryx also performed well up about 14% but, once again, this was due to multiple takeover bids in the fund.
“Our two large healthcare holdings EKF and NIOX when taken together were broadly flat although we do expect them to be additive to the net asset value in the current financial year as EKF’s enzyme business expands and NIOX core business continues to grow at a rapid pace.
“Fund management stocks performed poorly due to difficult market conditions with Frenkel Topping and Assetco both down significantly. The fall in Polar Capital was, however, offset by its dividend.
“Gleeson and Hargreaves Services were flat over the year but have performed strongly in February as the prospects for the sector have improved.
“Emerging life science investments continue to be challenged and perform very poorly over the period but now account for less than 0.5% of assets so any further weakness will be immaterial to the portfolio.
“Finally recent investments in Conduit, Paypoint, Pendragon, Carrs and Spire have all performed well relative to appropriate indices and we expect further good performance in the current year.
“Economic and political uncertainties, together with interest rates remaining higher for longer, suggest that the current year will be challenging. Nevertheless, we have substantial cash balances to take advantage of opportunities as they arise and believe that our existing investments are well placed to meet these challenges.”
Quoted portfolio USA
“This US portfolio currently has only one position Mountain Commerce which performed poorly as investors moved into higher interest bearing accounts thereby squeezing margins. Nevertheless, the company’s loan book remains in excellent shape with minimal bad debt.”
Unquoted portfolio UK
“The unquoted portfolio had a good year in fiscal 2024. One of the direct investments, Spring, performed notably well resulting in a substantial uplift in valuation. We are hopeful of a liquidity event during the next twelve months at a further uplift.
“The private equity funds also performed well with Utitec being sold in Fund 3 and Assisi and Vegner being sold in Fund 5 all at uplifts to the end January 2023 valuation. We would expect further realisations in the current year.
“Source Bioscience, which was taken private late last year, sold its stability storage division at a favourable price which has resulted in a return of capital in the first quarter of the current year of £2.28m.
“We adopted a conservative policy in fiscal 2024 as higher interest rates, a weakening economy combined with a worsening environment for corporate profits led us to believe that we should wait for a more favourable environment.”
Unquoted portfolio USA
“The portfolio consists of mezzanine loans at attractive interest rates where we also have an equity investment through the Private Equity fund.
“Our two principal direct investments, Performance Chemicals and Jaguar, also performed well and both are expected to see further progress over the next twelve months. Once again we would hope to exit both these investments at a premium to the current valuation. A substantial new investment completed post year-end, Crest Foods, which is described under note 9 of this report.”
Liquidity
“Cash and US Treasury Bills started the year at £109m and ended the year at £70m.”
Conclusion
“Your managers continue to actively review opportunities as evidenced by the number of new investments made during the year. UK equities are, in our opinion, cheap despite many headwinds. Consequently, we expect to continue to build the portfolio over the next twelve months as further attractive opportunities arise.”