When a manager with a good record leaves a fund it is a reason for investors to monitor the fund more closely than usual to see what happens next, although not necessarily a reason for immediate concern. But if that manager with a good record goes and sets up a new fund that appears to have similarities with the one he left, then you would expect his former colleagues to be concerned about a new rival.
And this is exactly what happened at UK smaller companies investment trust Strategic Equity Capital (SEC). Its lead manager until February 2017 was Stuart Widdowson of GVQ Investment Management, who since leaving has set up his own asset management firm. In April its first fund, Odyssean Investment Trust (OIT), raised £87.5m in an initial public offering (IPO), which it will also invest in UK smaller companies.
But Jeff Harris, lead manager of Strategic Equity Capital since February 2017, is not concerned about his former colleague launching a rival fund. "Stuart left with a view to setting the trust up a year-and-a-half ago, but over that time our share register hasn't changed much as we've been [running this process] a very long time as a team," explains Mr Harris. "Our investors understand that and have been rewarded over the long term."
Mr Harris worked on Strategic Equity Capital alongside Mr Widdowson between 2014 and 2017, and since becoming lead manager last year has not changed the trust's investment approach. It mainly invests in UK publicly quoted smaller companies, and its managers look to increase their value through strategic, operational or management change. GVQ describes this as "constructive corporate engagement" and says it aims to work with management teams in order to enhance shareholder value.
Mr Harris also argues that having more investors such as Odyssean Investment Trust analysing UK smaller companies could be beneficial to their share prices. These have always been less well researched than larger companies, and the situation has worsened since the start of the year due to the new Markets in Financial Instruments Directive (Mifid II). This requires the costs of research to be clearly identifiable when charged to clients and has led to fewer companies willing to pay for small-cap research.
"With the information gap surrounding small-caps, I do worry that some companies will get lost, always be unloved and unknown, and never really achieve their fair rating in a public market," explains Mr Harris. "And that's an area we look to engage with companies to help them be more mature and [deliver] what the public market is looking for in terms of the way they engage with investors."
For example, some companies have hidden positive characteristics, which they do not adequately explain to the market. These include Medica (MGP), a market leader in the transmission of healthcare images such as X-rays, and CT and MRI scans, to different locations. Mr Harris says 80 per cent of the company's growth comes from existing clients.
"They just don’t say it loud enough," sighs Mr Harris. "Small companies can be great at what they do, but the public markets are a whole different animal and companies can do things they think are really great, but the market thinks differently. And then the company doesn't understand why its share price isn't reflecting what they think is a great idea."
Mr Harris is also frustrated at the short-termism of public markets and thinks this is one of the reasons why growth companies are increasingly choosing to remain private rather than list. A recent example of short-termism in action was how the market reacted to the full-year results announcement of 4imprint (FOUR), which Strategic Equity Capital has owned since 2006 and is one of the trust's 10 largest holdings. 4imprint produces promotional products for businesses, including pens, caps and t-shirts.
"It's a great business and has been a phenomenal investment," says Mr Harris. "But when in its results they said it was now at [a good] size and had a significant market opportunity to explore traditional media like TV, advertising and radio, which would cost $7m (£5.15m) and lead to a one-year downgrade to profit by that amount, the market hated it and the share price came off. There may be companies in Strategic Equity Capital's portfolio where they take decisions the market doesn't like, affecting the share price and quarterly or annual performance. But if it's the right thing and increases the value of the company over the long term then we will always support it."
Jeff Harris CV
Jeff Harris was appointed lead manager of Strategic Equity Capital in February 2017. This followed three years as a deputy fund manager on GVQ Investment Management's strategic and unconstrained mandates. He joined GVQ in 2012 as a senior analyst, and worked on existing and potential investee companies.
Before this Mr Harris worked in the transaction services team at PricewaterhouseCoopers performing financial due diligence on private equity and corporate transactions. He has also worked at Macquarie as a European banks analyst.
Mr Harris holds the ACA and IMC qualifications.
