PE has outperformed the stock market over most time horizons. Gresham House Strategic PLC (LON:GHS) aims to do likewise by using PE techniques to generate 15% IRR p.a. long term. Detailed due diligence is undertaken on companies with strategic, management or operational change options. Other techniques include focus on cash generation, constructive management engagement and input from an experienced Investment Committee and Advisory Group, all mitigating risk. The manager has a strong track record implementing this strategy while at SVG. With the share trading at a 20% discount to NAV investors have a good entry point and the assets are quoted securities or cash (£15m). GHS’s small cap, value focus may also see cyclical outperformance. It has beaten the FTSE small cap (ex IT) index by c6% over the last year.
► Strategy: Applying PE techniques to smaller quoted companies imposes a strict set of criteria designed to deliver enhanced performance. While this approach is relatively new to GHS (strategy adopted August 2015) there are established competitors which support its use and management has expertise in the field.
► Investment Policy: Target portfolio is 10 to 15 UK/European, mainly public companies. It will focus on companies below £250m market cap with an expected hold period of 3-5 years, seeking influential, block stakes (i.e. 10% to 25%). Borrowing limited to under 20% gross assets.
► Valuation Anomaly: The 20% discount rises to 38% if we strip out the residual cash. Its companies are valued at around half the FTSE All Share level and forecast to deliver twice the growth. In due course, GHS may have a good yield with the intention to distribute up to 50 per cent. of (initially tax free) realisation profits and has locked in £1.2m of gains half of which will be available for dividends (c15p p/sh). Its NAV rose from 985p on 17th June to 1,075p on 2 Sept.
► Risks: A concentrated portfolio is at risk from one company suffering unforeseen events. For historic reasons, GHS has c40% of the portfolio in IMI Mobile). PE returns while better than the market over the long term, can be volatile. Shares may be issued to fund growth.
► Investment summary: Gresham House Strategic PLC uses an approach that has delivered superior long term returns. It is focussed in the small cap value area which also has over the long term outperformed the market. Pricing anomalies in the inefficient small cap market create opportunities to use PE techniques, especially when conditions are volatile / value investing out of fashion. The manager is aligned with shareholders (owning c20% of GHS. Recent team buying in the market.
