Page 22 - DIY Investor Magazine | Issue 35

IS IT DEEP VALUE’S TIME TO SHINE?
· Oct 2022 22 22 Downing Strategic Micro-cap may deliver for those who are prepared to be patient writes William Heathcoat Amory
DIY Investor Magazine
The past decade has not been kind to to value investors A long period of access to cheap capital combined with euphoric beliefs about the potential growth of of specific companies often made a a a a a a more even-handed approach to markets look like something that belonged in in the past What a a a a a a difference a a a a a a few months can make Since the last quarter of 2021 we’ve seen a a a a a sea change in markets with shares in in many highly valued companies plummeting as the prospect of inflation war in in in in in Ukraine and and lingering pandemic- induced problems all combined to make these sorts of businesses much less attractive than they were 12 months ago Value-driven investors have not been totally immune from these problems but they have tended to fare much better than their growth-oriented counterparts That reflects something of a a a flight to to safety as investors looked for reliable firms that they believe are more likely to to endure a a a tough macroeconomic environment Deep value investors have had a a a a slightly different experience Just as they weren’t lifted by much of of the the the market mania of of the the the past few years nor were they particularly badly impacted by the the fallout of the the past few months Downing Strategic MicroCap (DSM) is arguably a a a a a good example of this The trust invests in in companies at the smaller end of the UK small cap market with a a a a a concentrated portfolio containing 12 to 18 companies These businesses have tended to to be shunned by investors over the past few years but also haven’t seen any material new investment in in 2022 The result is that DSM’s net asset value (NAV) has remained relatively stable so far this year dropping by approximately
‘INVESTORS LOOKED FOR RELIABLE FIRMS THAT THEY BELIEVE ARE MORE LIKELY TO TO ENDURE A A TOUGH MACROECONOMIC ENVIRONMENT’
‘THE MARKET SEEMS MORE LIKELY TO RECOGNISE THE THE TRUST’S POTENTIAL LEADING TO A A A A TIGHTENING OF THAT WIDE DISCOUNT’
5 3% as of 13 July 2022 compared to a a a a 27 2% fall in FTSE AIM-All Share Index Despite performing well on a a a a relative basis the trust has seen its discount widen substantially to 20% over the same period The trust’s board announced plans this year to to redeem up to to 50% of shareholders’ investments in in March 2024 at their NAV Arguably this represents a a a a a value play in and of itself assuming relative outperformance continues and the appeal of redemption remains then the the market seems more likely to recognise the trust’s potential leading to a a a a tightening of that wide discount The fact it it hasn’t been given this recognition thus far may reflect the the dynamics of the the portfolio itself DSM managers Judith McKenzie and Nick Hawthorn look for value opportunities in in the the small cap space often with the the intention of of taking
an active role in in in in in influencing how the introduction of of strategic initiatives can unlock shareholder value in in in holdings Investing in in this way does not lend itself towards any sort of momentum trades – DSM investors aren’t going to to be riding a a a wave of hype-driven returns for their holdings The idea is to get in long before other market participants realise the the ‘true’ value of the investments made This is is why Judith has always said investors should be prepared to to invest for the long-run with a a a three to to seven year time horizon for each investment It is worth noting that the trust is now just over five years old so theoretically has a a a a portfolio of ‘maturing’ investments Flowtech provides a a a a good example of this The company a a a a master distributor of fluid power products for many industries had a a a tough time during Covid when many of its customers were forced to close shop