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Downing Strategic Micro-Cap to close after 'dispiriting' couple of years

09 November 2023

Pessimism towards small British businesses and a lack of interest from investors led to the decision to wind down the trust.

By Emma Wallis,

News editor, Trustnet

The £34m Downing Strategic Micro-Cap investment trust is winding down due to negative sentiment towards UK small companies, a failure to attract new investors and corporate activity within the portfolio.

Lead manager Judith MacKenzie said more than 20% of the portfolio is “in play”: bids have been agreed for two portfolio companies (OnTheMarket and FireAngel Safety Technology Group), while some of the trust’s other holdings are undergoing strategic reviews that should lead to exits and a return of capital.

MacKenzie and the trust’s board intend to return at least 20% of capital to investors in the first quarter of next year. After that money will be returned to shareholders regularly, as and when corporate activity in the portfolio enables this.

Providing that divestments are carefully managed, MacKenzie said she has “identified key catalysts within portfolio companies” that “indicate an upside of at least 50% to current market cap”.

Last year the board told shareholders it would give them the option in May 2024 to get half their money back but since then markets have continued to undervalue small- and micro-caps, as demonstrated by the trust’s discount of 15-17%.

Hugh Aldous, the trust’s chairman, said the board decided it would be fairer to all investors to wind up the trust in a phased and well-managed process. That decision is subject to shareholder approval.

“For micro-caps it has been dispiriting for two or three years. Valuations remain depressingly low in the glum markets of the UK,” he said. “Even good micro-cap stocks continue to be overlooked by markets, brokers, analysts, commentators and investors. Trading has been thin. Global drift, uncertainty, advisory fog and bouts of political dysfunction hardly help.”

The trust’s NAV per share fell 8.2% during the six months to 31 August and its share price slid 8.3%, compared to a 12.8% loss for the FTSE AIM All Share total return index. The trust bought back £1.1m of equity during the six-month period and its discount remained around 15-17%.

When compared to other trusts in the IT UK Smaller Companies sector, Downing Strategic Micro-Cap has delivered top quartile performance over the past 12 months, although it is second quartile over three years and fourth quartile over five years.

Performance of trust vs sector over 5 yrs

Source: FE Analytics

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.