by Cliff Weight, ShareSoc Director
Please note the views expressed in this blog are my personal ones. I hold shares in SEC and Gresham House.
Within 6 months of manager change and change of lead fund manager and break on SLA marketing JV, the largest shareholder puts stock into hands of an arb. What will happen next?
The background is in my 2 previous blogs:
RIT recently sold its 13% holding in SEC at a discount, of 22.8% – 9.47m shares traded at 202.5p on17th November at 11:50am. The NAV announced that morning for 16th November 2020 was 262.55p. Therefore discount was 22.8%.
Why did RIT sell? Presumably because it did not support the Board’s actions to address the chronic problem of the huge discount and/or it did not believe that the decisions taken to change the manger would deliver attractive returns.
RIT, never known to under sell and perhaps one of the shrewdest of investors in the market, have spoken. One question is what might have caused them to sell early and to dump the stock?
There are now c.37% of shares in the hands of investors who are playing the discount game – and others who want out. This is a big structural overhang and means we have a board who will be distracted.
In addition the new lead manager has conflicts to manage:
- His time /resource for stock selection (different universe and benchmarks?) now has 3 funds to manage , all with different briefs
- His motivation – the open ended fund offers higher fees, easier to sell versus SEC – and SEC has more sellers than buyers
- His time for marketing SEC.
Conflicts of interest- The manager Ken runs three OEICs as well as SEC.
It is easier to raise money/create buyer demand for an OEIC and more profitable for the manager than via an investment trust. Easier because the investor in an OEIC gets daily liquidity at net asset value , whereas for a trust , a shareholder faces a discount. It is more profitable for the manager as the fees are higher -in this case 90bp v75 bp. So it is very unclear why this will change – other than perhaps arbitrage buyers getting involved like City Of London, which acquired the RIT stake.
|SIZE £M||FEES||AIM||SMALL CAP|
|Multi Cap Income||67||75||44%||21%|
Here are three reasons which an attentive shareholder should be aware of.
1. Closing the discount – the board’s plans ignore this chronic problem and make it worse.
In the case of Gresham, the lead manager has four funds to manage of which two are sub-scale and one has an intractable discount. A time poor lead manager will use his time carefully and focus on the largest and most profitable fund. Shareholders in SEC will be on the second rung at best.
2. Driving the net asset value – limited resources and perverse incentives do not inspire confidence
SEC’s original proposition to investors was to deliver alpha from an engaged time intensive investment approach in semi liquid small cap companies. The new lead manager is responsible for four vehicles with varying briefs and a combined portfolio of over many holdings adopting a less engaged style of investing. Has he the time to cover the ground? To do the necessary research, engage successfully to bring about positive change or is this simple asset gathering exercise to expand Gresham House’s AUM?
Gresham House will have a powerful incentive to transition the SEC portfolio towards the portfolio held by the Gresham House MicroCap fund – the easiest way for a small team to manage costs and reduce complexity. For example, it has made a new investment in Inspired Energy, which according to its website Gresham House owns 19.8% of the equity https://inspiredplc.co.uk/investors-shareholders/ .
3. Limited skin in the game.
One NED, Jo Dixon, has recently bought shares. Given the public profile of the other NEDs, why don’t the others – it’s not as if they are short of a bob or two! And it is a sign of their own confidence in their own competence.
The Board of SEC has not really addressed these questions, although pressure is building as shares pass from previously friendly hands to investors who want change.
I remain positive that the discount will narrow and continue to hold my shares in SEC. I am of course not qualified to give financial advice and readers should do their own research.
I think you can be confident with CLIM having taken a large stake. They are expert in activist involvement with closed end funds trading a wide discounts. I think it’s highly likely that they will lean hard on the board to take actions to close the discount gap.
DISCLOSURE: CLIG (CLIM’s parent) is one of my largest shareholdings and a very well managed fund manager, IMO.
I guess for most investors with this sort of IT, you would invest with say a 5 year plus time horizon and therefore the primary question is whether Gresham House will outperm the market and justify their management fee.
If they do that the discount to NAV will naturally close. The continuing discount to NAV tells us that the market is not persuaded on Gresham House.
From my own perspective my knowledge of Gresham House in action is limited mostly to LMS (a private equity fund) where they were fund manager for around two years. LMS is sub-scale with a market cap of £25m and was outside of Gresham House’s comfort zone. It didn’t go well. I should disclose I own shares in LMS bought after Gresham House were removed as manager.
Citywire report “Rebel shareholders in Strategic Equity Capital (SEC) have stepped up their campaign for the specialist UK smaller companies investment trust to be wound up and its £194m of assets returned to investors.
In an open letter to the trust’s chairman Richard Hills before a continuation vote on 31 March, Ian Armitage and Jonathan Morgan, long-term investors who own 7.7% of SEC, said they and other investors had become disillusioned with a trust they believe has lost its way.”
SEC share price has increased nicely to 263p, since I first wrote about SEC on 17 Oct 2020 when the price was 185p. I hope this new action will reduce the discount to NAV.