STRATEGIC EQUITY CAPITAL: Hard graft helps finance big profits from small businesses
Investment trust Strategic Equity Capital seeks to make money for shareholders by investing in some of the UK’s smallest publicly traded companies.
While this sounds risky, the £150 million fund has come up with a formula that works. It is based on meticulous research, commitment to the companies it buys from and unafraid to substantiate its judgment.
The result is a portfolio that has delivered positive returns as many of its rival UK smaller company funds collapsed in response to widespread negative sentiment towards this part of the stock market.
Over the past year and three years, Strategic Equity has generated returns for investors of 7 and 71 percent, respectively. By contrast, the average UK smaller business investment firm has turned in a loss of 5 percent and a profit of 40 percent over the same period.
The trust is managed by Ken Wotton who works for Gresham House, an investment company that oversees assets of £8 billion. Gresham is an odd man out, specializing in managing portfolios built around alternative assets such as renewable energy, forestry and infrastructure. It also targets small UK businesses, both public and private – which is where Wotton fits into the Gresham puzzle.
Listed on the UK stock market, Strategic Equity invests only in listed UK companies, most of which are included in the FTSE Small Cap or FTSE AIM (Alternative Investment Market) index. Still, Wotton’s modus operandi is heavily influenced by his 12 years working in private equity.
“Private equity has a wide range of interpretations,” he says. ‘My interpretation is positive: it is there to build companies, generate scale and make them profitable. It’s the approach I take at Strategic Equity.’
He adds: “When looking for companies, the focus is on buying a quality company led by a good management team that can deliver growing profits. We don’t invest if we think the CEO isn’t good enough.’
Wotton describes the approach as ‘high conviction’. This results in a portfolio of just 17 companies, with the two largest — financial firm XPS Pensions and Medica, a telemedicine service — representing nearly 30 percent of the trust’s assets.
While acknowledging that such a concentrated portfolio could be perceived as risky, Wotton says he and his team are doing everything they can to make sure investment risk is mitigated – “by doing a lot of hard work and constantly engaging with the management teams behind the companies. we own’.
Medica has proven to be a winner for confidence. Last month, the board approved an acquisition by private equity firm IK Investment Partners. Wotton says it will bring a nice profit to the trust in the order of 50 percent.
Wotton says the undervalued UK smaller business sector will continue to attract interest from bargain-hungry private equity. He says any of the trust’s top 10 holding companies could be acquired.
“Every company we have is of high quality,” he adds. “Valuations are attractive, so there is acquisition potential. Hopefully, as with Medica, the shareholders of the trust will benefit from this.”
Not everything Strategic Equity touches turns to gold. For example, it recently sold a small stake in engineering firm Nexus Infrastructure, crystallizing a loss. Yet the winners outnumber the losers.
The trust’s exchange identification code is B0BDCB2 and its ticker is SEC. The annual costs total 1.2 percent.