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Questor: this manager’s track record is stunning but his trust is trading at a 14pc discount

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London Stock Exchange
London Stock Exchange

As the London stock market has recovered from its pandemic lows, the smallest listed companies have led the way.

While small company shares were hit hard by last year’s Covid crash, investors who clung on have been rewarded with a resurgence which has dramatically outpaced that of Britain’s big blue-chip stocks.

So it’s little surprise that among the best performing investment trusts of the past year are those that invest in these companies, or that their shares, once alluringly cheap, are now decidedly less so.

For funds focused on the very smallest London-listed firms, the recovery is particularly pronounced. Shares in trusts that hold British “micro-cap” companies have gained an average of 79pc over the past year while their discounts, which had reached as wide as 23pc, have now shrunk to just 6pc below the value of their assets, according to the broker Numis.

That recovery has been welcome news for this column, which has tipped a trio of these funds: River & Mercantile UK Micro Cap, Gresham House Strategic and Downing Strategic Micro-Cap. But it means the search for bargains in this area of the market has become harder.

Opportunities haven’t disappeared completely however. Questor’s attention has been drawn to a trust now run by one of the most successful micro-cap investors of the past decade, but whose shares trade at a 14pc discount.

Ken Wotton took charge of Strategic Equity Capital in September last year and has so far delivered similarly strong returns to those that have propelled his Gresham House UK Micro Cap fund to the top of the performance charts.

Shares in the trust have risen by 59pc over his short period at the helm and while the discount has narrowed from nearly 20pc over that time, it remains significant, especially in the context of the 367pc return Wotton has delivered for investors in his UK Micro Cap fund over 10 years, more than three times the average for British smaller company funds.

Wotton has already made his major portfolio changes, so savers who invest now don’t face any surprises. His buys have also proved shrewd: Fintel, a financial services group first bought for the trust in October at around 143p, now trades at 228p, while Ten Entertainment, the bowling chain bought the same month at around 134p, has rallied to 249p.

Nick Greenwood, manager of the Miton Global Opportunities investment trust, started to buy shares in Strategic Equity Capital towards the end of last year, encouraged by Wotton’s appointment as manager.

“It’s a classic situation where the shares trade on the track record of the trust rather than the record of who manages it now,” he said. “We simply took the view that Ken Wotton on an 18pc discount was very good value.” This column agrees.

Questor says: buy

Ticker: SEC

Share price at close: 302.5p

Update: Gresham House Strategic

Shares in another of our micro-cap trust picks run by the same fund group, Gresham House Strategic, dipped last week when the resignation of the lead manager, Richard Staveley, was announced shortly after a bust-up between the board and Gresham House was made public.

Shares in the trust are still 47pc to the good since Questor tipped them in November, even after the past fortnight’s events, but Staveley’s departure represents a blow.

The manager had joined Gresham House in late 2019 and had overseen a number of canny buys for the trust last year, such as supporting fundraisings by RPS, the professional services firm, whose shares have since doubled, and Van Elle, the engineer, now trading at 76pc more than the price at which new shares were offered to investors.

Questor recommends that readers hold on, however. A bid last week for the trust’s largest holding, Augean, the waste management company, highlights not just the promise of the portfolio but the attraction of its discount. That discount has now doubled to 16pc in just a week, as the trust’s shares dipped 6pc despite the boost to its assets. Hold.

Questor says: hold

Ticker: GHS

Share price at close: £14.60

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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