Lack of takeover activity hurts Odyssean Investment Trust

Odyssean Investment Trust (OIT) announced its annual results for the year ended 31 March 2024. The company saw a NAV total return of -3.7%, trailing the benchmark return of 3%. Shares fell -5.2% with the discount widening to 0.7%. The manager noted that the company’s performance reflected markets and volatility driven by stock specific issues. Unlike in previous years, none of the portfolio companies benefited from takeover activity, which, it says, in a concentrated portfolio can make a significant difference to returns.

Discussing the performance, and the outlook, chairman Linda Wildng commented:

“For much of the period since the company launched UK equities, particularly UK Smaller Companies, have been out of favour, despite the compelling value they have been offering for the past couple of years. Whilst the portfolio manager and my predecessor must have felt like lone voices at times, pleasingly over recent months there has been a much broader recognition of this anomaly and opportunity.

“It’s impossible to predict the timing of any reassessment and re-rating of UK equities, nor the specific catalyst or catalysts driving this. Assuming we are at the peak of the interest rate cycle, the first interest rate cut might be one such catalyst. The board shares the portfolio manager’s belief that the company’s portfolio companies should be major beneficiaries of this change.

“Whilst we wait for this re-evaluation, further M&A activity is possible. The portfolio was not a major beneficiary of M&A in the year under review, potentially due to its skew towards industrial companies – a sector where there was limited M&A during 2023. However, it is notable that M&A activity among industrial companies has appeared to re-emerge in 2024, just as trading conditions appear to be on the cusp of recovering. The recent bid interest for portfolio company XP Power is more evidence of this emerging trend.

“Alongside the potential optionality from M&A, whilst we wait for sentiment to change, many portfolio companies have the scope to drive improved operating profits from strategic and operational initiatives which are in the control of their management teams. Elementis and Spire are good examples where the respective executives have announced structural cost savings and efficiencies to drive an increase in EBIT (Earnings Before Interest and Taxes) of at least 30%, alongside initiatives to improve sales growth. Such examples of self help at these companies, and others in the portfolio, have been masked or seemingly not reflected in share prices due to depressed sentiment. This augurs well for future returns as the investment market improves.

“The closed ended fund structure has been a good match for the investment strategy since the company launched, offering the portfolio manager certainty of capital in difficult times, and allowing them the luxury of buying or adding to stakes in less liquid quoted companies at attractive valuations. As markets rebound, it also enables the portfolio manager to manage capacity and capital carefully to optimise returns to existing shareholders.”

OIT : Lack of takeover activity hurts Odyssean Investment Trust