River and Mercantile Asset Management is set to make a new foray into the investment trust market with the launch of a UK micro-cap equity trust for Philip Rodrigs.
River & Mercantile, whose name is indelibly associated with the investment trust sector from previous incarnations of the firm, is aiming to raise £100m for the new product.
Managed by small-cap star Mr Rodrigs, the River and Mercantile UK Micro Cap Investment Company will invest in 30 to 50 UK firms with a market capitalisation of between £10m and £100m. He will use the same potential, valuation and timing (PVT) process employed by the group’s UK equity funds.
Following the fundraising period, which has yet to open, River and Mercantile plans to list the Guernsey-domiciled trust on the London Stock Exchange by late November.
The manager said the current environment suited the launch of a micro-cap equity fund because “entrepreneurial confidence seems to be picking up right now” and there were “signs that companies are executing on growth plans”.
River and Mercantile has opted for the investment trust approach rather than an open-ended fund because of the illiquidity of micro-cap stocks.
The trust will also remain at £100m, which Mr Rodrigs believes is the optimum size for the strategy. If it grows larger than £100m for a significant period as a result of market movements, River and Mercantile will return all the excess cash above £100m to shareholders in the form of capital rather than income.
The trust will have an estimated ongoing charge of between 1.25 per cent and 1.5 per cent and will also charge a performance fee of 15 per cent of any out performance of the Numis Smaller Companies ex Investment Trusts plus Aim index.
Mr Rodrigs acknowledged investors had mixed feelings towards performance fees but said it was “imperative” to charge one in order to make the strategy sustainable, given that the trust would never grow beyond £100m in size.
Although the current River and Mercantile firm was formed in 2005, the name stems from 1881, when the River Plate Trust Loan and Agency Company was incorporated.
In 1962 the company became River and Mercantile Trust and by 1994 the company was managing five investment trusts with a total of £400m in assets.
Pacific Investments bought the company in 1995 and eventually rebranded it as Liontrust Asset Management, but it retained the rights to the River and Mercantile name and re-launched it in 2005.