Gresham House Strategic (GHS) describes itself as a ‘strategic public equity’ fund, meaning it takes a private equity-style approach to investing mainly in listed companies, buying significant stakes and engaging proactively with holdings to create and unlock value through operational, strategic and management initiatives. It currently has 18 holdings (15 equities and three convertible loan notes) spread across a range of industries, but all based in the UK. Performance has been strong in the past year (NAV TR +22.6% and share price TR +52.5% over 12 months to 31 January 2020), with a large contribution from top holding Augean (share price +224% in 2019). The management team at Gresham House argues that this validates the strategy, and the narrowing in the discount over the past 12 months (from c 25% to 2.3% in late 2019) suggests the market is beginning to appreciate what GHS offers.
While stock markets have performed strongly over the past year, equities still look reasonably valued on a global basis versus negative-yielding bonds. Meanwhile, the UK stands at a significant valuation discount to the US, and within the UK, smaller companies still look inexpensive versus the broader market. Furthermore, value investing as a style remains out of favour, so a fund with a value-creating approach to investing in unloved UK smaller companies may prove attractive, given political uncertainty has arguably peaked and the government is expected to take a pragmatic approach to Brexit negotiations in order to minimise the economic impact.
Differentiated, high-conviction approach to the UK small-cap opportunity, underpinned by significant due diligence.
GHS invests on a three- to five-year horizon, and after four-and-a-half years under the current manager, results are now coming through at both the operational and share price level of underlying holdings.
Highly experienced, well-resourced management team and investment committee, backed up by a network of industry experts to help drive turnarounds.
The portfolio is concentrated with fewer than 20 equity holdings, broadly diversified by industry and investment stage. Board commitment to growing dividends at least 15% year-on-year.
At 19 February 2020, GHS’s shares traded on a 10.0% discount to NAV. This compares with an average discount of 14.9% over the past year, ranging from a high of 24.7% in March 2019 to a low of 3.4% in December. Over three years and since inception of the current strategy, GHS’s discount has averaged c 21.0%, so the current level represents a material narrowing relative to history. The managers have ambitions to see the shares trading at NAV, allowing them to raise cash through share issuance to fund further investments. GHS has paid a dividend since FY17 and now pays out twice yearly, with a commitment to growing the dividend by at least 15% a year. The shares currently have a yield of 1.6%.