Investment firm Downing will launch a trust which aims to scoop up an annual return of 15 per cent by investing in listed small companies.
The Downing Strategic Micro-Cap Investment Trust is the first closed-ended vehicle offered by the company and aims to tap into the returns associated with private equity, coupled with the transparency of investing in listed companies.
Managed by Judith MacKenzie, the trust will own between 12 and 18 individual investments, holding up to 25 per cent in the equity of any one company where the team believes the business is significantly undervalued.
The trust will follow a similar strategy to the open-ended vehicle, the Downing UK Micro-Cap Growth fund, which is also run by Ms MacKenzie.
According to figures from FE, the fund has returned near 24 per cent over the past year, beating the IA UK Smaller Companies sector which has returned 20 per cent over the same period.
The investment team will aim to mitigate risk through extensive due diligence, and will also proactively engage with the companies to improve their business models, which could include restructuring boards and funding acquisitions for growth.
Ms MacKenzie said: “Our investment process should enable the trust to mitigate much of the perceived ‘risk’ in quoted smaller companies.”
She also said the closed-ended structure ensures the interests and investment horizons of both investors and the fund manager are closely aligned.
“Companies with a market cap of under £150m – and particularly those under £50m - lack analyst coverage and institutional attention which drives pricing inefficiency and, therefore, attractive valuations.
“There is a wider universe of micro-cap companies, therefore, we believe, there is a wider opportunity compared to those companies with larger market capitalisations, as micro-cap companies tend to better value.”
The trust charges an annual management fee of 1 per cent and has a minimum subscription of £1,000.
Philip Milton, Devon-based Philip J Milton & Co, said the trust launch was "brave", pointing out that there are few small cap trusts because it's largely VCT territory.
"Downing has a good pedigree in the sector through VCTs," he said, adding more exposure to the small-cap sector is to be welcomed.
However, he said unfortunately he would not support this trust at the moment because so many UK smaller company investments having been riding on large discounts to net asset value, including private equity.
"Greedily we feel our clients’ best short-term interests lie in those instead."
Mr Milton said the trust might see shares fall to a small discount, and warned it might be difficult to maintain momentum unless a few good outcomes lead performance.
"It will be good for Downing to enter the mainstream space, so a good boost to the results could see more fundraising."