Downing Strategic Micro-Cap To Begin Managed Portfolio Wind-down

In the trust's half-year results published today (9 November), chair Hugh Aldous said that the board had decided the best way to return capital to shareholders would be to begin a managed wind-down of the portfolio, subject to shareholder approval. 

DSM said this was due to corporate activity arising from the continuing negative sentiment towards smaller companies and small investment trusts, and in light of 20% of net assets now 'in play' with agreed bids or strategic reviews, which the trust said should lead to exits and a return of capital.

The trust expects an initial return of capital of at least 20% of net assets, which it said could be delivered in early 2024, subject to the successful completion of two agreed bids. Further returns will then be made as liquidity and trade exits permit.

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The proposal follows the trust's announcement last year that it would give stakeholders the opportunity to opt for a return of 50% of their investment in the trust in May 2024.

DSM's board is currently consulting with the trust's investment manager on the best way to go ahead with the portfolio wind-down.

Judith MacKenzie, the lead manager of DSM, said: "The overhang of 2022 has seen the negative markets sentiment towards UK smaller companies continue.This is despite DSM highlighting its portfolio of well-run, niche businesses that have largely weathered a challenging economic backdrop.

"Meanwhile, the catalysts in the portfolio are being recognised and realised, with over 20% of net assets now 'in play' with agreed bids or strategic reviews that should lead to exits and a return of capital."

In the six months to August 2023, DSM reported an 8.2% drop in net asset value per share and an 8.3% share price fall. 

The management noted that, despite greater declines among all relevant UK indices, investors have "retreated" from equity markets, even those that "are cheap".

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Aldous said: "In truth, even good micro-cap stocks continue to be overlooked by markets, brokers, analysts, commentators, and investors. Trading has been thin. The story seems to be similar for much of the FTSE All-Share TR. Global drift, uncertainty, advisory fog and bouts of political dysfunction hardly help."

He argued the trust's negative performance reflects the "continuing downbeat view of equity markets, particularly in the UK, with low multiples even on the valuations of DSM's portfolio companies".

According to data from the Association of Investment Companies, Downing Strategic Micro-Cap is currently trading at a 17.8% discount to NAV. 

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