Strategic Equity Capital (SEC) has reported a difficult year to 30 June. After seeing 78% of shareholders hold on to their shares in last October’s 100% tender offer, the company was hit in the first half of this year by a double whammy of Middle East turbulence and the sell-off of software and data companies on fears of artificial intelligence disruption, although high premium bids for Inspired and Ricardo were helpful.
As a result, the £133m investment trust, managed by Ken Wotton at Gresham House, made a loss of 2.2% although shareholders total return including the annual dividend was a 0.6% gain.
Nevertheless, that fell behind the FTSE Small Cap (ex-Investment Trusts) index which rose 7.6%. The latest fact sheet shows that at the end of August SEC had generated a 16% total shareholder return over five years that trailed its benchmark’s 23.8%.
Wotton said work with investee management teams and sector specialists indicates that the portfolio’s enterprise software businesses “possessed durable protections, including proprietary data, deep market and situational expertise, regulatory barriers, embedded customer workflows and trusted system-of-record status that should be resilient to the potential threats posed by AI.
“In several cases, artificial intelligence should enhance product capability and efficiency rather than undermine the business model,” he said, adding that he had used the period to add to some of high-conviction holdings at depressed valuations.
Our view
Matthew Read, senior analyst at QuotedData, said: “These are disappointing results for Strategic Equity Capital (SEC) shareholders, but the story is a familiar one. The trust was hit hard by the sell-off in perceived AI-exposed businesses during the ‘SaaSpocalypse’ earlier this year, despite trading across most of the portfolio remaining robust. Some ground has since been recovered as the market has become more discerning between companies vulnerable to AI disruption and those that stand to benefit from it.
“SEC remains a concentrated portfolio and that inevitably brings volatility. However, UK smaller companies remain cheaply rated and corporate activity provides an additional route to value realisation. There could therefore be meaningful upside from here, particularly if SEC’s portfolio companies prove to have the defensive moats against AI disruption that the manager believes they do.”
