The manager says the team subscribes to a “private equity-style” investment philosophy, which focuses on bottom-up research and rigorous due diligence – a process that can take up to 18 months. She adds: “We are long-term holders of businesses and we typically look for a catalyst to unlock shareholder value. This may be through improving strategy, corporate governance, operations and/or the capital structure.”
The fund typically invests in companies with a market cap of less than £150m at the time of investment. Ms MacKenzie also looks for firms with strong management teams, healthy free cashflows and demonstrable barriers to entry that help to protect profits. “We look favourably on businesses whose values can be covered in part or whole by net tangible assets. We tend to avoid firms that are highly speculative, or which are in particularly opaque markets,” she says.
The manager notes that while the team pays attention to the macroeconomic environment, the investment process is focused on the “fundamentals of a business as opposed to being guided by macro events or investor sentiment”.
The fund’s B-accumulation share class sits at a level of four out of seven on the risk-reward scale, while ongoing charges are 1.4 per cent, the key investor information document shows.
For the five years to November 4 2016 the fund’s B-accumulation share class has comfortably outperformed the IA UK Smaller Companies sector. It delivered a return of 125 per cent compared with the peer group’s 87.1 per cent, data from FE Analytics shows. In addition, the vehicle has outperformed the sector over three years, while the 12-month return of 1.7 per cent only slightly lags the peer group average of 2.9 per cent.
Ms MacKenzie notes companies entering the portfolio in the past 12 months have included Pennant International Group, which has “excellent brand intellectual property in the defence sector”, and Fulcrum Utility Services, which installs and manages a portfolio of utility-type assets.
“We have also increased our holding in employment services business Norman Broadbent, which we consider to be a strategic position having facilitated a board restructure. Firms that have exited the portfolio include Dart Group and Renewable Energy Generation.”
The manager says that since Brexit, “our companies have benefited from currency tailwinds as a result of weakening sterling”. But she adds: “Due to running a concentrated portfolio, our stock-specific risk is relatively high, though we aim to mitigate negative surprises through regular interaction with management teams. Our investment process is value-driven, which we believe to be lower risk than a growth strategy, while still delivering market-beating returns. We are focused on the long term, and our returns over three and five years are strong on both an absolute and risk-adjusted basis.”
Recent detractors from performance include firms such as Sprue Aegis and Universe, a payment and online loyalty solutions business for UK petrol forecourt and convenience stores, which sold off on the back of a minor profits warning due to a delayed start in some contracts. But the manager adds: “We are confident that the business has the ability to continue to deliver outstanding growth.”
Looking ahead Ms MacKenzie says: “At a company level the impact of currency volatility is a focus for the remainder of the year. While weak sterling will benefit exporters, it will have the opposite effect for importers of any goods that are invoiced in non-sterling denominations. We are paying particular attention to the cost of goods sold and trying to understand where we are likely to see some margin pressure as a result of these increasing costs, where they can’t be passed through to the customer.”
