Smaller company and private equity specialist Downing has announced plans to launch its first investment trust for star fund manager Judith MacKenzie (pictured).
The company is looking to raise £100 million for the Downing Strategic Micro Cap Investment Trust which would invest in some of Britain's smallest listed companies along similar lines to the Downing UK Micro-Cap Growth open-ended fund that Citywire AAA-rated Mackenzie has run successfully for six years.
MacKenzie and her team seek to unlock value by proactively engaging with 'micro cap' companies with a market value of under £150 million. By restructuring boards, aligning management incentives to shareholders and refinancing firms' growth strategies, they have achieved a total return of just over 47% in the three years to the end of February with their existing fund.
This is more than double the 21.7% achieved by the average fund in the UK Smaller Companies sector and ranks it third out of 49 funds in the sector, ahead of rival 'micro cap' funds from Marlborough and Octopus.
'Companies with a market cap [capitalisation] of under £150 million – and particularly those under £50 million – lack analyst coverage and institutional attention which drives pricing inefficiency and, therefore, attractive valuations,' MacKenzie said in a statement.
The investment trust would have a more focused portfolio than MacKenzie's other fund, with 12-18 investments compared to a range of 25-30. It would take strategic equity stakes of between 3% and 25% in companies the team believes are significantly undervalued.
Using gearing – or borrowing – of up to 15% MacKenzie and co-managers Alyx Wood, James Lynch and Nicholas Hawthorn believe they can generate an average compound annual total return of 15% over three to seven years.
If enough investors back Downing, the investment trust would list on the London Stock Exchange and issue shares at 100p each and start life with 98p of net asset value per share.
Shareholders would pay an annual management fee of 1% of net assets to Downing but with no additional performance fee.
After three years shareholders would get an option to redeem their investments at close to net asset value. It is hoped this would prevent the shares falling to a wide discount but if they did, the trust would buy back up to 15% of its shares each year in a bid to reduce supply and get the share price nearer NAV.
The planned launch will be the third micro-cap focused investment trust, facing competition from the £103 million River & Mercantile UK Micro Cap (RMMC), run by Citywire A-rated Philip Rodrigs for three years; and the £106 million Miton UK Micro Cap (MINI), managed by A-rated duo Gervais Williams and Martin Turner since 2015.
It comes at an opportune time for the sector as investors return to smaller companies following their mauling after the Brexit vote last summer. RMMC has done particularly well in the past year with a re-rating of its shares driving down their discount from 11% to 2.8% and generating total shareholder returns of 30.5%, the fourth best in the 19-strong UK Smaller Companies trust sector.