The managers of Aim-traded investment company Gresham House Strategic (GHS:920p), a constituent of my 2016 Bargain Shares Portfolio, pulled off a masterstroke in August by selling down their stake in Aim-traded technology company IMImobile (IMO:240p), a £159m market capitalised company that helps businesses engage with their customers across mobile devices by offering smart software products.
GHS originally bought IMImobile’s shares at 155p each and the holding had done so well that it represented more than half the portfolio by value. The decision to cut the weighting to less than a quarter realised £13.8m of cash proceeds, and a £7.3m profit, representing an eye-catching internal rate of return of 28 per cent. It also meant that GHS ended the first half of its financial year to 30 September 2018 with net cash and liquid assets of £13.8m, accounting for 30 per cent of the portfolio’s £44.9m value, before markets and, IMImobile’s share price too, took a tumble. GHS has used some of the cash to make selective acquisitions since then and currently has around £10m of firepower to invest.
The performance of IMImobile was a key driver behind the 6.4 per cent rise in GHS’s net asset value (NAV) per share to 1,263p in the six months to the end of September 2018, and the 17 per cent growth reported year on year. GHS also made successful exits from holdings in asset manager Miton Group (MGR:54p), a company I remain favourable on, and bar operator Revolution Bars (RBG:104p).
Interestingly, GHS’s portfolio has held up remarkably well since 30 September 2018. The company’s NAV per share has fallen by only 4 per cent to 1,210p whereas the FTSE SmallCap index (ex-investment trusts) is down 10 per cent, and the FTSE Aim All-Share index is off almost 20 per cent in the same period. This extends the fund's outperformance against the FTSE SmallCap index (ex-investment trusts) to 15 percentage points since the appointment of Gresham House Asset Management as investment manager in mid-August 2015.
Bearing in mind the portfolio’s outperformance, it’s interesting to note the investment managers’ comments on the equity market. They highlight an element of UK sector rotation within UK equities as more traditional companies with a ‘value’ bias have started to outperform while the top-performing sector over the last decade, technology, has been significantly de-rated.
As value investors, GHS’s portfolio managers find “both of these phenomena interesting as we look to deploy capital and examine pipeline opportunities in an environment of rising interest rates. Picking up on some of the recent dynamics, some analysts are finally starting to call a rotation out of 'growth' stocks and a return to 'value' investments. Value stocks have become increasingly out of favour over the past decade, exceeding the extremes seen in the dotcom bubble as the spread between value and growth performance reached an historic high.
They add that “in an environment of monetary tightening, moderate economic growth and significant corporate debt levels, there is arguably an environment where a reversion from growth stocks and increased appetite for value stocks may finally be brewing.” This makes a lot of sense to me and there is a ‘safety margin’ embedded in adopting such an approach, given that GHS's shares are priced on a 24 per cent discount to NAV even though around 23 per cent of the portfolio is in cash. Or to put it another way, adjust for cash on the balance sheet, and you are effectively buying GHS’s equity portfolio for almost a third less than its carrying value, an anomalous valuation given the investment manager’s track record.
The board has also decided to ramp up the income distribution (paid from cumulative realised profits) to shareholders. Having made a maiden payout of 15p a share in 2017 the dividend will be lifted at the rate of at least 15 per cent a year, implying a minimum payout of 26.2p a share in 2021. A half-year dividend of 8.75p a share will be paid on 21 December 2018 as part of a minimum annual payout of at least 19.55p a share in the 12 months to March 2019.
I last highlighted the investment case around the current share price in early summer (‘Seeking value opportunities’, 26 Jun 2018), so the holding has held up incredibly well throughout the autumn stock market turmoil. Longer-term holders from my 2016 Bargain Shares Portfolio have made a total return of 19 per cent on their investment. Importantly, I maintain the view that the investment risk and the manager’s sound approach point to a favourable outcome materialising in the coming years, too. Buy.
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