A 14% discount to net asset value at Strategic Equity Capital (SEC) suggests significant rerating scope remains at this concentrated trust of 20 carefully selected small cap names.

Since seasoned investor Ken Wotton took over as lead manager last September, the discount has narrowed, and we think an improved net asset value performance driven by portfolio changes offers a catalyst to bring the discount in further.

Focused on quality companies, the £191 million cap trust has seen three holdings receive takeover bids this year – IDOX (IDOX:AIM), Equiniti (EQN) and Proactis – and other companies owned by the fund could potentially receive premium priced offers from trade and private equity buyers in the near term.

Following the appointment of Gresham House in May 2020 after a period of poor performance, Wotton was appointed lead manager in September to work alongside Adam Khanbhai and reinvigorate the trust’s fortunes.

Wotton’s experience working in a private equity environment meant he was well suited to Strategic Equity Capital’s investment strategy and he also boasts a superb long-term track record. His open-ended fund, LF Gresham House UK Micro Cap (BV9FYS8), is the only IA UK Smaller Companies Sector fund to have delivered positive, absolute returns in each year since its 2009 launch.

Strategic Equity Capital’s focus is on high-quality companies in attractive end markets which Wotton believes can materially increase in value through strategic, operational or management change.

The strategy now has a much higher level of engagement with management to create stronger businesses over the long term and uses private equity-based techniques to establish valuations, including a focus on cash flows and the potential value to a financial or trade buyer.

Wotton’s review of the portfolio resulted in some changes to the holdings. ‘We liked the strategy, but we felt its application could be more effective,’ he told Shares, noting the trust now benefits from Gresham House’s extra resource and extensive network of contacts.

The emphasis has shifted so that new investments are within the £100 million to £300 million market cap range, a sweet spot of under-researched companies, many trading on attractive valuations.

Companies on higher valuations in the £300 million to £1 billion cap range have been sold, with proceeds recycled into growth names in the £100 million to £300 million range.

Holdings include tenpin bowling operator Ten Entertainment (TEG), Fintel (FNTL:AIM), which proffers fintech and support services to the UK retail financial services sector, and estate agency operator-to-mortgage intermediary services play LSL Property Services (LSL).

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