Gresham House Strategic – a very appealing small cap investor

Gresham House Strategic is well worth consideration for medium-term investors, writes Mark Watson-Mitchell.

Well, this is a different profile candidate for me to offer readers.

Today I am suggesting that Gresham House Strategic (LON:GHS) is well worth consideration for medium-term investors, especially those who, like me, enjoy smaller companies.

Firstly, the big negative about this investment company is its lumpy share price, which is a deterrent to so many investors who would otherwise find this company an attractive situation. Goodness knows why company bosses seem to be impressed by such bulky prices for their company’s shares.

This is not a FTSE100 company with eons of history, but instead as its managers like to opine, it is a ‘strategic public equity fund’.

GHS is an independent, AIM-quoted closed-end investment company that invests primarily in smaller UK public companies.

However, I believe that its investment managers have played the market well this year and they have actually achieved some real gain out of the Covid-19 hiatus.

Luckily the fund went into the lockdown period flush with cash, following a couple of useful portfolio disposals, and thereby had the ability to take advantage of some devastated share prices and almost distress cash calls.

The size of the company is, perhaps, another turn-off for some investors, but I think differently.

Its market capitalisation is just £34m, while its invested funds are worth some £42m. That is like getting £12 of worth for just £10 – a useful discount to net asset value.

The biggest constituent in the portfolio is one of my favourite stocks – Augean (LON:AUG). In fact, it makes up over 25% of the entire portfolio. I am looking forward to a favourable Q3 trading update from that company within days.

Other stocks in the GHS closed-end fund include: Northbridge Industrial Services (LON:NBI), RPS Group (LON:RPS), ULS Technology (LON:ULS), Fulcrum Utility Services (LON:FCRM), Flowtech Fluidpower (LON:FLO), Van Elle (LON:VANL), Pressure Technologies (LON:PRES) (another of my profile stocks), and Centaur Media (LON:CAU). 

It also has about 6% of its fund invested in The Lakes Distillery Company, which is England’s largest whisky distillery and is an unquoted company.

The investment team, which has a long strong track record, includes Tony Dalwood, Richard Staveley and Laurence Hulse. They are part of the Gresham House Asset Management team, which has some £3bn of assets under management. 

GHS applies disciplined private equity techniques, with constructive corporate engagement and by applying a thorough due diligence process alongside a long-term value investment strategic equity investment philosophy.

It is an alternative strategy that is highly engaged with its investee companies helping to drive strategic, operational or management initiatives. It targets inefficient areas of the public markets and is prepared to take influential minority stakes.

Its ‘value approach’ helps it to focus on intrinsically undervalued, cash generative companies and thereafter helping to identify value creation catalysts.

The proof that their philosophy works is the fact that the fund is consistently beating most other management teams in its smaller company sector. They have also outperformed the market indices.

A recent portfolio review suggested that some 79% of the company’s funds were invested in quoted companies that were valued at less than £250m. It has 12% in unquoted investments and 9% was in cash. It has a total of 17 holdings.

The company has some 3.48m shares in issue. Larger professional holders include Gresham House Plc (23.4%), James Sharp & Co (7.7%), Smith & Williamson Investment Management (7.2%), Hargreaves Lansdown Asset Management (6.6%), Unicorn Asset Management (6.3%), Premier Miton Group (4.9%), Interactive Investor Services (3.5%), Investec Wealth & Investment (3.2%), Berkshire City Council (3.0%), and River & Mercantile Asset Management (2.0%).

Investing in this company is not based upon revenues and profits earned, but instead it is about the potential growth in value. The investment team has a 3-5 years investment horizon, with a target of achieving returns of up to three times funds invested.

At the current 985p the company’s shares stand on a discount of around 18% to value. It is the management’s aim to reduce that discount and it has even been buying in its own shares to help this process.

I would suggest that more investors taking a view on the company would be the way to do it. Interest would be boosted if the shares were trading at around the 98p level and not 985p. So why not broaden the appeal of the shares by way of a ten for one share split issue?

Anyway, I now set a medium-term target price of 1,300p on the shares.