Page 21 - DIY Investor Magazine | Issue 36

Predicting takeover bids is notoriously difficult but the companies in the DSM portfolio have some characteristics that may make them appealing to buyers.
One is that the managers take a more value driven approach to markets. This is part of the reason the portfolio has delivered relative outperformance this year.
It also means they look for good companies that have potential but which the market is undervaluing – the same sort of businesses that M&A buyers have shown an interest in as well.
As a result of this, companies in the portfolio possess traits that may potentially make them more likely to be subject to takeover bids. Firstly, DSM’s holdings derive a larger proportion of their earnings from outside the country than the average of trusts in its peer group, the AIC’s UK Smaller Companies sector.
Given some of the concerns around the UK economy’s prospects, this shouldn’t be overlooked.
The bulk of the trust’s holdings also refinanced their debt last year, prior to interest rate hikes coming into play. As a result, they may be less susceptible to increasing interest costs.
There are also plenty of companies in the portfolio, like digital publisher Digitalbox, that are sitting on a net cash position, meaning they should be better able to ride out a period of economic instability.
If any holdings are subject to M&A activity, then DSM should be better positioned compared to some of its peers. DSM’s managers have long held a highly concentrated portfolio. Since its launch in 2017, the trust has typically held only 12 – 18 companies.
The result is that if any takeover bids for portfolio companies
do come, this should have a meaningful impact on returns for shareholders, unlike other funds that may hold 4x or 5x as many companies.
A highly concentrated portfolio does work both ways, and so if any holdings disappoint, then investors are more exposed to the impact than they might be in a more diversified fund or trust.
If a takeover of a portfolio company were to occur then DSM could find itself with a significantly higher cash balance, which already stands at 10% of NAV.
This might prompt the board to revisit the idea of buybacks, which at the current level of c. 26% would further boost the NAV, and potentially help to narrow the discount.
Again, it’s worth remembering that there are no guarantees that companies in the DSM portfolio are going to be subject to takeover bids. But if they do, then the trust should be able to benefit from them more meaningfully than some of its peers.
See the full research on Downing Strategic Micro-cap here >
Disclosure – Non-Independent Marketing Communication.
This is a non-independent marketing communication commissioned by Downing Strategic Micro-Cap.
The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
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Dec 2022
DIY Investor Magazine ·