Downing Strategic Micro-Cap (DSM)

11/05/2022

Results analysis from Kepler Trust Intelligence

Over the financial year to 28 February 2022, Downing Strategic Micro-Cap's (DSM) NAV increased by 5.3%, versus the FTSE AIM All‐Share which was down 12% over the same period, representing significant outperformance over the period.

DSM is a 'value' strategy, in that the portfolio constituent's quoted prices are significantly below the value at which DSM's managers place their achievable market value.

The discount has averaged around 15% through the year. The board has announced that it plans to provide a significant redemption point on 31 May 2024, assuming no serious market disorder. That redemption will enable shareholders to redeem or have a matched sale for up to 50% of their holding. In the Chairman's view, this should "encourage the market to improve its rating of the company's shares as we move towards that redemption point".

DSM's chairman said "DSM has now achieved two years of distinctive performance. It deserves more market attention". The manager states that they are currently "positive on the prospects for our holdings which are generally cheaper than the wider market, with stronger balance sheets and good growth prospects from the compelling products or services they provide".

Kepler View

Downing Strategic Micro-Cap (DSM) is a highly differentiated strategy, and one that employs the advantages of the investment structure to enable it to provide a very different exposure for investors than would be found in many other smaller company trusts. Performance in the calendar year to date perhaps reflects a change in the fortunes of DSM, in being the only trust in the UK Smaller Companies sector to have increased its NAV.

Over the year, DSM invested in six new companies deploying £11.1m in cash, and follow on investments in five existing holdings, deploying £3.4m of cash. At the period end the company had net cash of £3.8m, around 8.8% of net assets.

Performance since IPO has perhaps not been everything that the board and manager would have hoped. However, performance during the last financial year has been impressive, in a period which has seen the peer group struggle. Despite this strong performance, DSM's discount has widened from the average level during the last financial year, and is currently wider than 20%.

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