Rights and Issues (RIII), the £106m UK smaller companies trust struggling on a 19% discount, has taken a step to maximise its chance of reinstating desperately needed share buybacks.

A vote to resume share buybacks, which was blocked twice by a big shareholder last year, will be presented as an ordinary as well as a special resolution at the annual general meeting next month. 

The ordinary resolution will require 50% of votes to pass making it harder for one shareholder to block than a special resolution requiring 75% approval. It will be put to shareholders if the special resolution is defeated.

The absence of buybacks since last March exacerbated what Jupiter fund managers Matt Cable and Tim Service said had been a “difficult and disappointing” year, one that QuotedData said in November left RIII looking “oversold”.

Shareholders suffered a 12.4% total loss, with semi-annual dividends included, compared to the portfolio of smaller companies’ underlying investment gain of 4.2%. That was the result of the shares’ discount to net asset value (NAV) widening from 6.4% at the end of 2024 to 23.6% at 31 December caused by the board having to stop purchasing shares. 

The total growth in NAV not only lagged the 19.8% rise in the FTSE All-Share Capital index, it also fell short of the more relevant Deutsche Numis Smaller Companies index which returned 12.7%, illustrating the relative weakness of small-cap stocks as investors continued their exodus from the sector in favour of other global markets.

Boost from bids

Cable and Service have managed Rights and Issues since October 2022 following the retirement of its former, original fund manager Simon Knott. They said four takeover approaches had helped performance last year but were “symptomatic of an equity market that is not appropriately valuing high quality businesses”. 

Industrial chain manufacturer Renold soared 72%, currency and payments specialist Alpha Group leaped 79% and fund administrator JTC, a new holding, surged 57% on their bids. Flavours and fragrances business Treatt ended up slumping 45% after its potential bidder withdrew, but RIII’s managers had already exited, happy to take the initial bounce in September in a stock that had been hit by two profit warnings earlier in the year. 

Specialist lender OSB was another highlight, advancing 69% after setting new strategic targets and enjoying a benign economy with interest rates falling. It also benefited from changes to capital rules for smaller banks that should allow it to return more cash to shareholders.

Fund outflows hit good stocks

The big problem, said the managers, was the underperformance of what they viewed as high quality companies delivering good performance. For example, multi-utility business Telecom Plus fell 17%, identity verification and fraud detection specialist GB Group shed 23% and cloud communications provider Gamma Communications slid 39%. 

“In each case the company has delivered financial results broadly in line with original expectations, but seen significant share price weakness driven by a decline in valuation (as measured by the ratio of price to earnings),” they said.

Some companies did struggle. Packaging distributor Macfarlane fell 31% after it was forced to cut prices to keep retail customers reeling from cost-of-living increases and had to suspend operations at its Pitreavie factory in Cumbernauld after the death of a worker. 

The managers believe “persistent outflows” from UK smaller companies funds lies behind the selling pressure on higher-quality stocks. They don’t consider the stock deratings anticipate a deep earnings recession as this would be reflected in the market more widely.

Great environment for UK stock pickers

“While we acknowledge that the UK economy has challenges, we do not see these as unusual in a global context. Macroeconomic indicators (inflation, growth, interest rates etc) are not universally bullish; but neither are they pointing to an imminent economic meltdown,” they said. 

As a result they remain confident that this is a good environment for long-term investors to buy great businesses at attractive valuations, pointing to their additions of workwear and linen rental business Johnson Services Group, marine services company Ashtead Technology, geotechnical engineer Keller and pensions consultant XPS last year.

Chair Dr Andrew Hosty said: “As we look forward into 2026 we hope to resolve the share buyback issue, to be able to provide greater liquidity for our shareholders and manage the discount.” 

Despite the underperformance of the trust in the past three years, he said: “The board believes that our team at Jupiter have the skills and knowledge to identify these [quality companies] and so continue to be well placed to deliver for your company into the future.”

Our view

James Carthew, head of investment company research at QuotedData, said: “Since we started writing on Rights and Issues in April 2023, we have used the Deutsche Numis Smaller Companies plus AIM ex Investment Companies as one of our performance comparators for the trust, in recognition that this is a UK small-cap trust and the Deutsche index is more representative of the stocks in RIII’s portfolio. Measuring it against its peers, RIII’s NAV returns currently rank towards the bottom end of the second quartile over most time periods – not great, but not awful either. The main problem is the wide discount, which can be addressed when the trust secures authority from shareholders to buy back stock. We could see a rapid advance in the share price if the AGM resolution is passed.”

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