RCS - Down MicroCap InvTst - Results analysis from Kepler Trust Intelligence

Downing Strategic Micro-Cap Investment TrustAnnouncement

03/11/2022 07:00

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RNS Number : 1235F  Downing Strategic Micro-Cap IT PLC  03 November 2022

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.

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