Shareholders in investment trust Strategic Equity Capital (SEC) will be hoping that the buyout of its investment manager GVQ will bolster the share price and narrow the widening gap to net assets.
GVQ has secured a management buyout from backer RIT Capital Partners (RCP) which will make the investment manager 100% independent. The deal is believed to have been led by GVQ chief executive (CEO) Jamie Seaton and research committee chairman Jonathan Morgan.
With around £700m of assets under management, GVQ runs a couple of Irish-listed funds as well as Strategic Equity Capital. The trust largely invests in UK-quoted smaller companies on the LSE Small Cap index or AIM. The typical market cap of investee stocks is circa £150m at the time of initial investment.
DISCOUNT GAP WIDENING
Despite Strategic Equity Capital’s benchmark-beating performance this year its share price discount to net assets has continued to widen.
The investment trust saw net assets increase 21.8% in 2017 to date, according to data from broker Numis Securities. That compares with an 18.7% return for the NSCI ex ICs (Numis Smaller Companies Index ex Investment Companies) and a 14.9% rise for the FTSE Small Cap ex ICs index.
Yet based on the current 235.75p share price, the discount to net assets stands at 13.3%. That’s up from 11.4% as of the 31 December 2016, and from an average gap of 9% during the second six months of last year.
POPULAR FUND MANAGER’S DEPARTURE
Part of the reason for this may be the surprise departure in February of respected fund manager Stuart Widdowson. He left to set-up an independent investment company and it is thought many Strategic Equity Capital investors may have stayed loyal to Widdowson, following him to his new operation.
Strategic Equity Capital responded to its perceived valuation gap problem early in 2017, launching a share buyback programme. Year to date the trust has purchased 1.95m of its own stock at the cost of £4.33m.
NET CASH DRAG
But another problem the trust has faced is a hefty cash holding during a firm bull market. As of 30 September 2017, net cash on the trust’s books stood at £15.9m, or roughly 10.4% of the market cap. This was largely due to acquisitions of investee companies (E2V Technologies and Servelec (SERV)) filling its balance sheet coughers with profitable returns, but capping its exposure to buoyant equity markets.
With GVQ’s own future now apparently settled analysts at Numis Securities believe there is scope to narrow the share price to net asset valuation gap as investors become more comfortable with its management.
Of Strategic Equity Capital’s 17-strong holdings (as of 30 June 2017), its top 10 stakes are worth 75% of net assets, and offer forecast median earnings growth of 14.5% versus the 10% average of the FTSE Small Cap benchmark, Numis calculates.
STRATEGIC EQUITY CAPITAL’S TOP 10 STAKES
Equiti (EQN)
Market cap: £1.05bn
Total return 2017 year to date: 60.6%
Servelec (SERV)
Market cap: £221m
Total return 2017 year to date: 18.9%
Tribal (TRB:AIM)
Market cap: £160m
Total return 2017 year to date: 40.9%
Clinigen (CLIN:AIM)
Market cap: £1.26bn
Total return 2017 year to date: 46.3%
IFG Group (IFG)
Market cap: £194m
Total return 2017 year to date: 26.4%
EMIS (EMIS:AIM)
Market cap: £644m
Total return 2017 year to date: 8.3%
Wilmington (WILM)
Market cap: £203m
Total return 2017 year to date: -11.7%
4 Imprint (FOUR)
Market cap: £523m
Total return 2017 year to date: 7.6%
Medica (MGP)
Market cap: £223m
Total return 2017 year to date: N/A
Tyman (TYMN)
Market cap: £631.6m
Total return 2017 year to date: N/A
*Market cap data 28 December 2017, Performance data via Bloomberg, 27 December 2017
