The UK small-cap market is having a difficult time. The macro picture is not on its side and smaller companies are almost always the first to suffer during challenging economic conditions.
It is during such periods investors are presented with the opportunity to secure holdings in vehicles which can provide returns long into the future.
With a discount of 16% and a dividend yield of 2%, investors should consider the Rights and Issues Investment Trust for exposure to the UK small-cap market.
The trust invests a minimum of 80% of its assets in UK small caps and AIM-listed companies.
Over the past 10-year period, the Rights and Issues Investment Trust’s NAV has returned 137.9% compared to the FTSE All-Share Benchmark’s return of 70.6%.
Managers Daniel Nickols and Matt Cable look for opportunities that can provide above-average returns over the long term and avoid short term trading opportunities.
Investing in small caps and the AIM is all about conviction and the managers of the Rights and Issues Investment Trust have this in abundance.
The Trust has employed a concentrated low turnover approach to stock selection since its inception in 1962 and only has about 20 stocks in the portfolio.
As of the end of August, the top ten holdings accounted for 69% of the portfolio demonstrating the conviction in their holdings.
Top Ten Holdings (31.08.23)
| Vp Plc | 10.26% |
| Macfarlane Group Plc | 9.74% |
| Colefax Group Plc | 9.26% |
| Hill And Smith Plc | 7.39% |
| Renold Plc | 6.38% |
| Telecom Plus Plc | 5.76% |
| Treatt Plc | 5.56% |
| Alpha Group International Plc | 5.53% |
| Gamma Communications Plc | 5.43% |
| Carrs Group Plc | 4.82% |
| Total | 69.0% |
Positioning for recovery and future growth
It is easy to over-diversify a small-cap portfolio and hug the benchmark’s performance. However, material outperformance is typically achieved through a highly concentrated selection of high-conviction ideas.
Since Jupiter was appointed as the manager of the Rights and Issues Investment Trust in October 2022, Nickols and Cable have stayed true to the trust’s historic approach to concentration and conviction, but have set about putting their own stamp on the portfolio.
While maintaining a high level of concentration, the first half of 2023 saw a number of holdings cut from the portfolio while some of the larger holdings were reduced to make space for new additions.
At the start of 2023, the portfolio held positions in 22 stocks with the top five positions accounting for 50% of NAV and the top ten for 76%.
On 31st August, Rights and Issues held 21 stocks with the top five accounting for 43% of NAV and the top ten for 67%.
The top holding accounted for 12.6% of the portfolio at the beginning of the year which reduced to 10.26% at the end of August.
These are marginal amendments and likely reflect the new manager’s desire to bolster the portfolio with higher conviction ideas, rather than move away from a strategy of high concentration and low turnover.
A number of smaller holdings such as Titon Holdings and Coral Products were sold as was Castings which the managers felt offered little upside.
The disposals made way for four exciting new additions; OSB Group, Marshalls, Spirent Communications and Gresham Technologies. These holdings expand the trust’s exposure to banking, UK construction, technology and communications.
What is striking about these new additions is that they present cyclical opportunities which should provide handsome returns during an economic recovery.
OSB is particularly interesting. OSB is a specialist buy-to-let mortgage provider and has suffered dearly in the current environment. The group has experienced adversities in the face of changes to interest rates and general pessimism around the UK housing market.
OSB represents an out-of-favour small-cap company with a plentiful opportunity for recovery. The same can be said of building materials company Marshalls.
Again highly linked to the UK housing market, Marshall’s sales have suffered this year as new house building slowed and shares trade substantially below the 52-week high.
None of the four new additions are in the top ten holdings suggesting the managers are willing to gradually build positions during the periods of share price weakness in preparation for the eventual recovery.
This highlights Rights and Issues’ long-term approach to investing in small-caps and the willingness to build a high conviction position over time.
