Page 29 - DIY Investor Magazine | Issue 32

Although it still has exposure to Real Good Food, DSM’s investment in the company thus far shows another benefit of going down the market cap scale. Aside from being able to find good value, the smaller size of these businesses mean DSM can take larger stakes in them and have more say in how they’re run.
That might mean, as in the case of Real Good Food, acting more like a private equity firm and engaging with management to realise existing assets. Alternatively, it could be persuading firms to make internal changes to their business efforts or personnel.
THIS MAY TAKE A WHILE...
Whether DSM takes a more active approach to its investments or leaves management to the managers of the company itself, one of the challenges facing the trust and its shareholders is the time it can take for both turnarounds to be implemented and investors to cotton on to a small cap success story.
The investment in Real Good Food, for instance, took several years to materialize and is still ongoing.
Part of the reason for this is that turnarounds, whether it be selling off assets or restructuring a business, can be slow to take place. Any benefits they may confer can take years to materialize as a result.
The other problem is due to the lack of information available about small caps. Although this works in DSM’s favour by creating more opportunities to find good value companies, it also means the rest of the market can take a long time to figure out that a company is worth investing in.
As this is the ultimate driver of share price growth, there can be a longer lag in time between a company proving itself and its share price increasing than there typically is further up the market cap scale.
A HOCKEY STICK PORTFOLIO?
This may be part of the reason DSM has tended to underperform its benchmark, the Numis Smaller Companies Index since launching. But it’s also something the trust managers have been telling shareholders to expect from the start.
‘DSM’S OWN MANAGEMENT TEAM HAS BEEN INVESTING IN THE TRUST ITSELF’
MacKenzie and her team have said repeatedly that investors should expect to see returns over a 5 – 7 year period. They’ve also predicted a hockey stick-like performance over time, in which a period of underperformance is followed by strong returns.
There is no guarantee that their predictions will be proved correct, but heading into 2022 there are some positive signs.
The majority of the trust’s underlying holdings have seen insiders buying shares and DSM’s own management team has been investing in the trust itself, suggesting those who know most about the portfolio are confident enough to put their own money to work.
For those who share the managers enthusiasm for the UK’s smallest companies, and their view that the sector contains bargains for those with the patience to wait for them to reach fruition, this could be an interesting time to consider the trust.
See the full research document here >
Disclaimer – 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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DIY Investor Magazine · Feb 2022