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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