Page 28 - DIY Investor Magazine | Issue 32

FINDING VALUE IN THE MICROVERSE
Downing Strategic Micro-Cap offers value investors a unique approach to UK small-caps
Imagine browsing through a property website and stumbling upon a four-bedroom house for sale in a fancy part of London at the bargain price of £100,000.
The odds are you’d want to buy it but also be fairly sceptical of what you were really getting. Before signing a contract or making any bank transfers, you’d do some due diligence, ensuring the property was sound and that you weren’t just buying into a decrepit studio flat with a 3-month leasehold.
Assuming that everything was as advertised, it would be hard not to purchase the property. Whether you lived there or sold it on, you’d have found something priced a fraction of its true value, making it something of a no-brainer to buy.
UNLOVED STOCKS
Sadly for us, opportunities such as this rarely seem to pop up in life. As any weekday afternoon’s TV schedule will prove, lots of people are interested in property, and a successful property ‘empire’ is practically a fetish for Brits in particular, which means very rarely are such opportunities missed by bargain hungry property investors.
But according to the team at Downing Strategic Micro-Cap (DSM), a very different state of affairs exists for those interested in the UK’s smallest companies.
The investment trust, which was launched in 2017, invests in smaller UK stocks that typically have a market capitalization below £150m. It is also unusually concentrated as it typically only holds between 12 to 18 companies.
Aside from being trust managers Judith MacKenzie’s and Nick Hawthorn’s area of expertise, the focus on companies at the smallest end of the market is something that helps the DSM team find cut price opportunities. Unlike the capital’s property market, many London-listed small caps receive little attention from investors.
‘A STRONG EXAMPLE OF HOW DSM’S VALUE-BASED APPROACH CAN PAY OFF WHEN THINGS PAN OUT’
The result, according to the team at DSM, is that while the risks associated with the smallest companies should not be ignored there is arguably much more opportunity to find stocks in this part of the market trading well below their actual value than further up the market cap scale.
THE VOLEX VALUE PLAY
A good example is Volex, DSM’s largest holding, where the majority was purchased at 75p. The trust managers have realized value in the stock by selling down some of their position but believe there is still plenty of upside to be gained from it.
While they may yet be disappointed, the results from the investment so far are also a strong example of how DSM’s value-based approach can pay off when things pan out.
A similar story may be playing out with another of the DSM’s major holdings, Real Good Food, which was one of the trust’s first acquisitions back in 2017.
It’s also been a slightly different investment to Volex. Firstly, DSM took on both equity and debt in the company. Perhaps more importantly, its stake in the business was such that it could take a directorship role in the company and use that to try and enact the change it wanted to see.
HAVING A SAY IN THE BUSINESS
Part of that involved encouraging the company to sell of some off its subsidiaries and return cash to lenders and shareholders. The result has been a return on the trust’s initial investment of 15%, and while things may not necessarily pan out, the potential is there for more gains to come.
DIY Investor Magazine · Feb 2022 28