This week I am looking at Strategic Equity Capital (SEC), a specialist investment trust that invests in UK listed companies below £1bn in market capitalisation.
The approach taken by the SEC team is unique, as they look to create value through taking significant positions in smaller companies and engaging with these companies to bring about strategic, operational or management change. When looking to find which companies they wish to invest in, they will look where they believe their expertise can create positive results for all shareholders and focus on those companies trading at the most attractive valuations. The valuation techniques they use are similar to those used in the private equity market, with a focus on cash flow and the potential value of the company if it were to be sold in private markets.
The trust is managed by Jeff Harris and Adam Khanbhai, both having taken over in February 2017 after the departure of Stuart Widdowson. Jeff and Adam had been working on the strategy since 2012 and 2014 respectively, with Jeff being the Deputy Manager at the time. They are supported by 2 analysts who have been trained in an accounting background and progressed to specialise with advice in relation to mergers and acquisitions.
This trust is highly concentrated, with 72% of assets held in the top 10 holdings, all in relatively small companies and therefore returns can be quite volatile over the short-term. These risk factors need to be considered when investing but this high conviction approach with a skilled management team can produce attractive long-term returns.
In his most recent report, Jeff outlined that the team were “cautious optimistic” with their long-term outlook. However, he warned that share prices in the smaller company sector of the UK market remain sensitive to Brexit risk and reduced liquidity in the short term.