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Bargain shares: double bill of fund management plays

A top-performing small-cap investment company has recruited its former lead manager who was responsible for its top quartile growth, while its former manager is set to benefit from a cash windfall
Bargain shares: double bill of fund management plays
  • Star fund manager Richard Staveley returns to lead Gresham House Strategic under new manager Harwood Capital
  • Harwood offers to purchase Gresham House’s stake in GHS at net asset value, so producing a cash windfall

Aim-traded investment company Gresham House Strategic (GHS: 1,745p) has parted company with Gresham House Asset Management (GHAM) and will now be managed by Harwood Capital.

This follows the resignation of GHS’s lead fund manager Richard Staveley at the end of May, which then prompted a strategic review by the board. Staveley had been instrumental in the success of the fund with two-thirds of the investment portfolio made up of stocks acquired during his tenure. Over a five-year period, GHS has produced a 130 per cent total net asset value (NAV) return, and 94 per cent in the past three years, outperforming the UK Smaller Companies investment trust average by over 40 per cent in both periods.

He is now returning as lead fund manager on 1 December when GHAM’s contract expires and Harwood takes over the mandate. GHS will change its name to Rockwood Strategic. Harwood has an impressive investment track record in small-cap equities through North Atlantic Smaller Companies Investment Trust (NASCIT), Oryx International Growth Fund (ORYX), and Odyssean Investment Trust (OIT). Since 1982, when Christopher Mills became the investment manager for NASCIT, the trust has delivered NAV total returns of 190 times.

GHS’s annual management fees are being reduced from the current level of 1.5 per cent of NAV to 1.25 per cent up to £25m and 1 per cent thereafter. This represents an annualised cost reduction of £270,000. A revised performance fee equal to 10 per cent of outperformance over the higher of a 6 per cent total return hurdle and a high watermark will reduce performance fees, too. This looks a sensible resolution.

Importantly, the fund continues to perform well, delivering an 8.5 per cent total NAV per share return and 14.4 per cent share price total return in the 16 weeks since my last update (‘Alpha alert for investment gains’, 23 June 2021), taking the total return to 129 per cent since I included the shares in my 2016 Bargain Shares Portfolio. Priced 8.5 per cent below spot NAV of 1,908p, I see no reason to change my positive stance on the shares. Run profits.

The fee income lost is immaterial to Gresham House (GHE:850p), a fund manager specialising in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies. However, the group also directly holds 812,000 shares in GHS, or 23 per cent of the share capital, which were carried in its half-year accounts at £11m. Harwood has undertaken to offer to purchase Gresham House’s entire holding of GHS shares at a price equal to the latest published NAV per share (a sum currently equating to £15.5m), as part of a proposal to facilitate a smooth transition in the interests of all shareholders.

If Gresham House takes up the offer, it will boost its cash and liquid resources to £69.5m (183p a share) after factoring in the net proceeds from the recent £40m placing and settling the £24m initial consideration on the complementary acquisition of Mobeus, a UK-investment firm with four VCTs and AUM of £389m (‘Bargain shares: Profiting from ESG investing’, 13 September 2021).

Adjust for balance sheet cash, and effectively Gresham House’s shares are rated on cash-adjusted price/earnings (PE) ratios of 14.5 and 13 based on Panmure Gordon’s recently upgraded 2022 and 2023 forecasts. That’s a low rating for a fund management group that continues to outperform and offers a clear run-way to deliver cumulative EPS growth of 45 per cent over the 2021-2023 forecast period.

Gresham House’s share price drifted modestly on news of the GHS lost mandate, but the holding is still showing a 176 per cent return on the entry point in my 2016 Bargain Shares Portfolio. The short-term weakness is a repeat buying opportunity and I maintain my 1,100p target. Buy.


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