Stand-out performance versus closed- and open-ended peers, despite market conditions, over the year
· NAV of 1,062.2 pence/share, down 14.3% during the period, impacted by 1Q20 market downturn
o Outperformed FTSE Small Cap ex IT index, by +10.5%
· Total Shareholder Return (TSR) of -5.2% over the year, and +16.2% on 3-year basis
o Beating FTSE Small Cap ex IT by +18.5% and +41.4%, over 1 and 3-year periods respectively
· Top-tier performance rankings, compared to both closed and open-ended peers over 3 years:
o 2nd of 26 AIC UK Smaller Companies funds for 3-year NAV (+4.1% vs sector average -8.4%)
o 2nd among the 50 equivalent UK Smaller Companies sector OEIC funds (GHS TSR vs sector average +4.8%)
· Since inception, NAV total return up 13% and TSR of 24.5%, well ahead of relevant indices
o FTSE Small Cap down 11.6% and FTSE AIM All-Share losing 5.1% over the same period
Tightening share price discount, despite COVID-19 market sell-off
· Discount narrowed from 22.6% to 15% over the financial year, peaking at 3.4% in December 2019
· £1.7 million of share buybacks support Board objective to maintain narrower discount
Board reaffirms 15% dividend increase for FY2020/21, repeating prior year commitment
· Final dividend of 12.8 pence per share proposed, bringing total dividends for the year to 22.9 pence per share
Continued outperformance since year-end
· NAV has rallied 14.3% since 31 March 2020, materially outperforming FTSE AIM All-Share index by +20.9%, but remains ‑7.7% lower on 12-month basis
· Positive TSR of 0.4% compares to declines in UK indices and AIC / OEIC smaller companies’ sector
Investment Management highlights
· Strong investment performance, in particular from:
o Augean plc, UK’s largest hazardous waste business
o IMImobile plc, material investment in mobile communications specialist, fully exited post year-end
o Successful December 2019 IPO of asset management business services provider MJ Hudson
· Five new investments made, with exciting return outlooks, low valuations and clear catalysts, timing often linked to the companies’ need for capital, including:
o Leading housing digital conveyancing platform ULS Technology plc
o English whisky distillery Lakes Distillery, via secured convertible loan note at 20% per annum return
o Market-leading piling, foundation services and equipment specialist Van Elle Holdings plc
· Operational and turnaround support in under-performing investments, and five smaller holdings exited
· Built team capacity and capability through the hire of Richard Staveley, an experienced small-cap fund manager, and Paul Dudley, a corporate finance specialist
· Structural dearth of smaller companies’ research continues to drive sector opportunity post-MiFID II
· COVID-19 downturn creating a surge in company re-financing needs and thus many more investment opportunities
· Consistent commitment to value, free cash flow generation and medium term investment time horizon
· Concentrated, engaged, SPE approach and portfolio are well positioned for the challenges ahead
· Board will continue to consider all opportunities to grow GHS.
The Directors have recommended a final dividend of 12.8 pence per share in respect of the year ended 31 March 2020. This will be put to shareholders at the AGM which is to be held at 10am on 17 September 2020. If approved, the dividend will be paid on 30 September 2020, to shareholders on the register of members on 4 September 2020, the ex-dividend date will be 3 September 2020.
David Potter, Chairman of Gresham House Strategic plc, commented:
“We outperformed the market and indices over the period, despite the downward market adjustment during February and March. Our portfolio included only one company exposed to sectors most affected by COVID-19, and we entered the market collapse with nearly 20% of the fund in cash. Our Investment Manager has been closely engaged with our portfolio companies to assess their situation which has allowed us to move fast to help those who needed finance. The past year has highlighted the benefits of the closed-ended structure and beyond the immediate opportunities which are visible, the structural attractions of our long-term, strategic public equity approach are strong”.
Anthony Dalwood, Fund Manager, Chairman of the Investment Committee and CEO of Gresham House plc said:
“This is an exciting time for our Strategic Public Equity approach. Our long-term focus has paid off during the past year and we are working hard to unearth the very best investment opportunities the current market and economic environment are generating. We continue to work closely with our portfolio companies to unlock and grow shareholder value.”
Richard Staveley, Fund Manager and Managing Director of Strategic Public Equity, Gresham House plc, added:
“With ongoing uncertainty regarding near-term economic activity, UK small caps are particularly cheap compared to large caps. This is reminiscent of the fantastic investment opportunities in the financial crisis more than a decade ago. Within small caps, value stocks are the cheapest compared to growth stocks in a decade. We expect the re-financing opportunity set to last for some time, as companies seek to raise equity capital and the upside is large for those investors willing to engage with smaller companies, due diligence the risks and support their development. In time, the priority will move from those which need urgent liquidity, to those with ambitious growth plans to unlock, and we remain highly focused on finding the very best investments to materially grow NAV.”
A copy of the GHS annual report will shortly be available in the Key Documents section of its website at www.ghsplc.com where further information on the Company can also be found.
Making forward looking statements in Chairman’s letters is a risky business. I am sure I am not alone in getting it wrong when I wrote to you in November. I was speculating that once the Brexit uncertainty was out of the way, things would look set fair for the SPE strategy and our Company. Along with virtually every other business, we did not have ‘pandemic’ anywhere on our risk register and certainly not at the top. But here we are, and an old saying has come right again “the hurricane always strikes from a different direction”.
Although it is too early to make definitive conclusions about the fallout from COVID-19, a few things seem discernible in the fog:
Households, businesses and governments lacked resilience. There were no savings, no reserves, no stocks, too much leverage, too long supply chains and too much on a knife edge of “just in time”. It is possible to expect a more cautious and conservative approach in the future.
History tells us that when governments take sweeping powers, they are reluctant to give them up quickly. The nature of the policy response prioritising massive borrowing will be a cost to the younger generation who may welcome an ongoing higher level of Government involvement in the economy.
There will be differential outcomes for various industrial sectors as it is generally assumed that practices and behaviours across customers, suppliers and the nature of business interaction will experience some permanent structural change and without doubt there will be a rapid and dramatic shift to digitalisation.
How does this leave GHS and our shareholders? Having had two years when I could report that we have outperformed the market and indices, it is ironic to be able to say that we have done it again in falling markets. The GHS net asset value (NAV) outperformed the FTSE Small Cap Index by 10.5% in the year and by 29.3% over the three years to the end of March 2020. And on a Total Shareholder Return (TSR) basis, GHS beat the index by 41.4% over the three years, coming second among its UK Smaller Companies peers, both compared to other investment companies, and the equivalent open-ended funds. Despite the downward market adjustment during February and March, our decline has been less than the market and it is important to understand why that is.
Our portfolio contained only one company engaged, and even then, only to a small extent, in retail, leisure, hospitality or transportation; the four sectors immediately decimated by the lockdown. We entered the market collapse with nearly 20% of the Company in cash. So that is the good news from an historical perspective.
The second piece of good news is that in markets like these, “babies can get washed out with the bathwater”. Many secure companies with reasonable business plans and prospects find themselves in difficulty, usually because they need finance in some form. As we are in close communication with and have a deep understanding of our investee companies, we can move fast to help if needed and appropriate. In the wider market we will actively seek out the best opportunities. During March, extensive communications occurred with all our investee companies to assess their situation. Most were able to manage within their existing financial resources, but a few needed some assistance. Our pipeline of possible investments has never been stronger and since the end of the year a couple of new investments have been made.
In the Investment Manager’s Report, you will see a summary of each of the key companies we are invested in and our assessment of their resilience in the face of what comes next. I am convinced that our knowledge of, and relationships with, our investee companies will demonstrate the validity of the Strategic Public Equity strategy in the coming months.
I mentioned in November that Richard Staveley had joined the management team at Gresham House as joint Fund Manager alongside Tony Dalwood, who remains also Chairman of the Investment Committee, bringing his track record of over 20-years in this specialist area to the day to day process. Graham Bird remains a member of the Investment Committee as he pursues his executive and non-executive career. I am glad that his experience and corporate knowledge will still be at our disposal having made a significant contribution to the Company since inception. In addition to Richard Staveley, the team has been strengthened by the appointment of Paul Dudley, who joins the team alongside Laurie Hulse, to handle the corporate finance aspects of our transactions. Gresham House, our largest shareholder, is growing as a platform for SPE investing as a result of other investment mandate wins and is expanding its capabilities in areas such as marketing, public relations and investor relations.
There have been some changes to our shareholder base. M&G, who had been a founding shareholder in the Company in 2015 realised their 12% holding in December 2019 with various existing and new shareholders taking their place. The GHS TSR of 24.5% since inception compares to the FTSE Small-Cap Index of 11.6%. We have continued to grow our investor base among private individuals mainly through their wealth managers. The events of the last year have underlined the benefits of closed-end funds, particularly for private investors. We have underlined our commitment to all investors by honouring our promise to raise our dividend by 15% this year and commit to do so by at least that again in 2020/21.
One of the most pleasing aspects of the year has been the narrowing of the discount between the share price and the NAV (-22.9% March 2019, -15% March 2020.) This has been as a result of good performance and a careful programme of share buy-backs. During the year, we spent £1.7 million which helped support the share price rising from 1,030 pence to 1,320 pence. Maintaining a narrower discount remains an important objective of the company and it reached a low of -3% before COVID-19 impacted markets. We believe that there has never been a better opportunity amongst unloved and un-researched small companies. MIFID II has also continued to work to our advantage as research on small companies dwindles and I hope that next year we will be able to capitalise further as the manager builds in team capabilities. There has been increased focus on how investment companies can attract and involve retail shareholders. The closed-end structure has proved its worth recently and it is to be hoped that IFAs and the retail platforms focus on bringing these benefits to the attention of their clients in seeking the best way to access the excess returns we have delivered historically through our specialist approach.
We have a large number of quite small shareholders, some of whom appear to have lost touch with us. Shareholders may be surprised to hear that we have £22,000 of uncashed dividend payments. We make continuous efforts to trace these shareholders, however, we shall in due course apply to the courts for the relevant outstanding sums to be re-credited for the benefit of the remaining shareholders.
I would like to thank my colleagues on the Board, our Investment Management team at Gresham House and all our other stakeholders for their constructive engagement during the year.