Downing Strategic Micro-Cap (DSM) aims to benefit from market inefficiencies amongst the UK’s smallest listed companies. The team employ a highly concentrated ‘value’ investment strategy based on fundamental analysis. They aim to buy strategic stakes (between 3% and 25%) in companies at prices that suggest a good ‘margin of safety’, but that are mispriced thanks to a problem or issue (real or misunderstood), but which is surmountable.
With three managers currently covering the portfolio of 12 stocks, the team have a depth of knowledge about their investments unlikely seen elsewhere. When necessary they actively work with investments to ensure a strategy dedicated to enhancing shareholder value is enacted.
Performance since IPO in May 2017 has been challenging, with the NAV down 35% and the share price down 52% (to 24 April 2020), underperforming UK smaller company trusts. The team have been clear with investors from the start, that tough decisions will need to be addressed within each company before improvements in share prices will be seen. With a five-to-seven year investment time frame, manager Judith MacKenzie expected a ‘hockey stick’ pattern of returns. By the start of 2020 she was becoming optimistic that DSM’s fortunes would turn. Much of the hard work on the portfolio had been completed, and one or more realisations validating the investment thesis were expected. Current markets have deferred, but not changed, that prospect.
In its annual report, the manager states their investments are well capitalised, and the majority give little cause for worry. The managers believe most holdings will emerge intact from the crisis. With net cash of 16% as at 24/04/2020, DSM’s managers can be opportunistic, but can also support portfolio companies if the need arises.