UK small-cap manager Stuart Widdowson has said he will not seek to significantly expand the size of his investment trust, even though its standout performance is beginning to attract investor attention.
Shareholders of GVQ’s £136m Strategic Equity Capital trust agreed at the end of August to a proposal for it to issue £20m in new shares in the next 12 months.
Mr Widdowson, an executive director at Jamie Seaton’s boutique fund house GVQ Investment Management, said the trust has taken advantage of this agreement and issued £5.5m in the past two months.
However, the manager is not intent on exploring appetite for the portfolio further, in spite of strong returns ranking it the country’s top-performing UK small-cap vehicle across one, three and five years.
The fund’s success means it is trading at a premium to net asset value of around 4 per cent, at a time when most small-cap trusts sit on hefty discounts.
Mr Widdowson said the portfolio’s size allowed him to focus on “truly smaller companies”. He added that peers with larger amounts of assets under management were often forced to invest in companies with a market cap of more than £300m.
He said: “We’re under no pressure to issue the remaining shares, and we would have to confirm with the board and our brokers that we were doing it for the right reasons if we wanted to. We plan to deploy capital in blocks.
“The trust benefits from being smaller because I can invest in a lot of the smaller companies that are trading at a double discount, which my peers can’t invest in. We find it beneficial to own firms that no one else owns.”
One company the manager claims is unique to his portfolio is IFG Group, owner of investment platform James Hay and advisory group Saunderson House. He described his investment in the firm – which is dual-listed in London and Dublin – as “unusual”.
He said: “This company is very much off the radar, but it’s a good restructuring story. It sold off all of its parts except two, which are businesses we know and like.
“One business is a leading platform in the UK, which we think is a very interesting space.”
Elsewhere, Mr Widdowson is expecting more mergers and acquisitions (M&A) to take place as a result of the strengthening US dollar. He said the relative weakness of the pound versus the dollar meant more US companies would be looking at their UK counterparts.
The manager said that while there was “quite a lot” of M&A activity at the start of this year, it had faded in recent months. He also expressed surprise that “knock-out bids” from North American companies had not materialised during this period.
“US corporations have strong balance sheets and generally they are quite keen to acquire UK companies, which look very attractive as acquisition candidates,” he explained.
“This will be quite exciting if the dollar strengthens.”
He added one potential catalyst for M&A might be the attractiveness of some UK smaller companies’ US operations.
At September 29, the trust had returned 17.6 per cent this year, outperforming the AIC UK Smaller Companies sector’s 15.5 per cent average return, data from FE Analytics shows.
The vehicle’s five-year figures are even stronger, delivering 291 per cent in the period, compared with the sector’s return of 116 per cent.
