At the end of last year, I made a compelling case to buy shares, at 920p, in Aim-traded investment company Gresham House Strategic (GHS:1,220p), a constituent of my 2016 Bargain Shares Portfolio (‘How Gresham House Strategic is outperforming’, 31 December 2018).
Not only had the investment manager pulled off a masterstroke in the summer of 2018 by selling down a chunk of its largest holding, Aim-traded technology company IMImobile (IMO), thus providing firepower to exploit investment opportunities elsewhere and diversify the portfolio, but GHS’s portfolio also held up remarkably well during the sell-off in equity markets in the final quarter of 2018. In fact, the company’s NAV per share only reversed by 5 per cent in the final quarter of 2018, or half the decline in the FTSE Small-cap index.
The fact that GHS’s share price has risen by 33 per cent since the start of 2019 not only reflects ongoing growth in the company’s NAV per share (up from 1,188p to 1,324p), but a growing recognition of the investment manager’s track record (total return of 11.4 per cent in the latest half year trading period compares favourably with a 0.2 per cent total return on the FTSE Small-Cap index). In turn, this has resulted in the share price discount to NAV per share narrowing markedly from 24 per cent to 7 per cent since the start of 2019 which should help facilitate GHS raising new funds to scale up and reduce its cost ratios, as well as widening the range and size of companies it invests in.
Bearing in mind the portfolio’s outperformance, it’s interesting to note the investment managers’ comments on the outlook. As value investors, GHS’s portfolio managers note that UK equities are not only very cheap by historical standards, but the discount embedded in UK small company valuations (the segment of the market GHS specifically targets) is wider than it has been for many years. The uncertain global macro economic backdrop remains conducive to a value orientated approach delivering superior investment returns at this point of the cycle, underpinned by a focus on company fundamentals, cash generation, downside scenario testing, and balance sheet strength.
| Simon Thompson's Bargain Shares Portfolio 2016 performance | |||||
| Company name | TIDM | Opening offer price (p) 05.02.16 | Latest bid price (p) 26.11.19 | Dividends (p) | Total return (%) |
| Bioquell (see note one) | BQE | 125 | 590 | 0 | 372.0% |
| Volvere (see note six) | VLE | 419 | 1150 | 0 | 188.2% |
| Gresham House | GHE | 312.5 | 605 | 3 | 94.6% |
| Oakley Capital | OCI | 146.5 | 233 | 13.5 | 68.3% |
| Gresham House Strategic | GHS | 796 | 1210 | 43.35 | 57.5% |
| Bowleven (see note two) | BLVN | 18.935 | 8.5 | 15 | 51.2% |
| Juridica (see note three) | JIL | 36.1 | 14 | 32 | 27.4% |
| Mind + Machines (see note four) | MMX | 8 | 7.5 | 0 | 2.8% |
| French Connection | FCCN | 45.7 | 33.2 | 0 | -27.4% |
| Walker Crips (see note five) | WCW | 44.9 | 25 | 5.59 | -31.9% |
| Average return | 80.3% | ||||
| FTSE All-Share Total Return | 5180 | 7620 | 49.1% | ||
| FTSE AIM All-Share Total Return | 747 | 1035 | 41.8% | ||
| Notes: | |||||
| 1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer and Simon recommended buying back the shares in the market at 145p to give an average buy in price of 125p (‘Bargain shares updates’, 22 June 2016). Company was taken over at 590p cash per share in January 2019. | |||||
| 2. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019. The total return reflects this share sale. | |||||
| 3. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016 and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy in price to 36.1p (‘Brexit winners', 1 August 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 April 2017), hence the price quoted in the table. | |||||
| 4. Simon Thompson advised buying Mind + Machines shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution. Simon advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018). | |||||
| 5. Simon Thompson advised selling Walker Crips shares on Monday, 4 March 2019 at 25p ('Bargain Shares Portfolio updates', 4 March 2019). This is the exit price quoted in the table. | |||||
| 6. Simon Thompson advised rendering 41.18 per cent of your holdings back to company at 1290p a share. Tender completed 19 June 2019 ('Tenders, takover and hitting target prices', 3 June 2019). Return is adjusted to factor in this capital return. | |||||
| Source: London Stock Exchange share prices | |||||
It’s a sensible approach, as is the board’s commitment 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 is being lifted at the rate of at least 15 per cent a year, implying a minimum payout of 26.2p a share in 2021. The latest interim dividend has just been hiked by 15 per cent to 10.1p per share and has an ex-dividend date of 5 December 2019.
The holding has produced a total return of 57 per cent since I included the shares in my 2016 Bargain Share Portfolio, and is trading at the highest level since Gresham House Asset Management took over the investment mandate in August 2015. Expect the strong performance to continue in the coming months as I not only anticipate a further narrowing of GHS’s share price discount to NAV, but believe that a positive election result for the Conservative Party (as polls indicate) would be viewed favourably by investors and could drive a sharp re-rating of UK small-caps, thus accentuating GHS’s investment returns. Trading on a bid-offer spread of 1,210p to 1,220p, I continue to rate shares in the £43m market capitalisation company a buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK]. Postage and packaging is only £3.95 for purchases of both books.
Details of the content of both books can be viewed on www.ypdbooks.com. They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential, too.
Simon Thompson has been named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards, a prestigious event celebrating the best and rewarding the finest professionals and companies that work within the AIM and NEX communities. It is attended by institutions, fund managers, brokers and advisors operating in the sub-£100m market cap quoted company sector.
