Downing Strate. Regulatory News (DSM)

Downing Strategic Micro-Cap (DSM)

03/11/2022

Results analysis from Kepler Trust Intelligence

Downing Strategic Micro-Cap (DSM) has released its half-year results for the period ending 31/08/2022. During the period, DSM saw a 6.7% decline in its net asset value (NAV). The trust's benchmark, the FTSE AIM All Share, fell by 14.6% over the same timeframe on a total return basis. DSM takes a value-driven approach to the market and the defensive characteristics that companies in the portfolio possess may have supported this relative outperformance.

The managers deployed £1.9m in the period, taking three new positions and adding to three existing ones. Realisations totalling £4.3m were made in the period under review, with a net gain of approximately £998,000. The trust managers had £5m in cash available to them at the period end, representing 14.7% of NAV. Further deployments of capital remain a possibility and the managers have a list of potential investments that they are prepared to make if valuations hit the requisite levels.

Despite holding up comparatively well in NAV terms over the six months to 31/08/2022, DSM's discount widened significantly. The trust's discount at the end of the period was 23.7%, compared to 14.8% at the end of February. There has been no substantial change to this in the intervening period as the discount sat at close to 25% as at 31/10/2022.

Chairman of the board Hugh Aldous said: "[The UK] needs further funding and economic growth to fuel investment. An important part of that investment should be in good, well-managed, vigorous small companies that meet national necessity and growth. [DSM's] portfolio matches that descriptor across important sectors. Even in troubled times it has proved resilient (hence the better performance against the market). It remains a portfolio for the future."

Kepler View

Downing Strategic Micro-Cap (DSM) takes a unique approach to the UK small cap sector, with a highly concentrated portfolio typically comprised of 12 - 18 stocks. Managers Judith MacKenzie and Nick Hawthorn take a value-driven approach to the market and look to invest at the smallest end of the London equity market.

It has been a tough year for markets as a whole but UK small caps have been particularly hard hit. Of the 24 trusts in the AIC's UK Smaller Companies sector, not one had produced positive total returns in NAV or share price terms in the 12 months up until the end of October.

DSM was no exception to this but despite performing comparatively well in NAV terms in relation to both its peers and benchmark so far in 2022, its discount is now among the widest in the UK small cap sector. As at 31/10/22, DSM shares were trading at a nearly 25% discount.

There are some potential tailwinds that may help to narrow the discount over time. One is the introduction of a share redemption that the DSM board has proposed takes place in May 2024 and means up to 50% of DSM shares can be redeemed at NAV. On the proviso that performance holds up then this may act as an attractive opportunity for some investors and help to tighten the discount.

Looking forward, it's plausible that the more value-oriented approach the managers take, combined with an already wide discount, could provide a cushion against further falls in the DSM share price relative to its NAV. If performance is steady or improves then, along with the prospective share redemption programme, one would hope that this might lead to a tightening of the discount - though there are no guarantees of course.

CLICK HERE TO READ THE FULL REPORT  Visit Kepler Trust Intelligence for more high quality independent investment trust research.

Important information

This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.

The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm's internal rules. A copy of the firm's Conflict of Interest policy is available on request.

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 70 Conduit Street, London W1S 2GF with registered number OC334771.