Just 24 hours after it was announced that manager Philip Rodrigs (pictured) had been sacked by the group “following an investigation into a professional conduct issue”, the share price of the investment trust he had managed since its IPO in 2014 plummeted 14.6% and today it is trading a 0.6% discount.
While this represents quite the turn in fortunes for the trust, 12 months ago it was sitting on a 9% discount and, according to Winterflood Investment Trusts, the falls in both the share price and discount, while dramatic, are warranted.
“The fund had been trading at an extended premium for the last weeks, which, even with such a strong track record, was difficult to justify in our view,” says Simon Elliott, a research analyst at Winterflood.
Key man risk
Indeed, Elliott says that further short-term pressure on the share price cannot be ruled out, bringing into focus the problem of key man risk when it comes to the running of investment trusts.
Since December 2014, the trust’s NAV is up 94%, compared with a 40% rise for the NSC ex Investment Companies plus AIM Index and a 51% rise for the wider small cap peer group.
At the start of February, the fund was the top performer in the IT UK Smaller Companies over 12 months with a share price gain of over 63%. However, it has since slipped back to fifth out of 19 funds in the sector, with a share price rise of 25.1%, which is still ahead of the sector average gain of 14.1%.
For Nick Greenwood, manager of the Miton Global Opportunities trust, the large drops the trust has seen since Rodrigs’ departure, represent the risks that investment trusts with key managers face when those managers leave.
“If you have a key manager following, the price that the trust trades at can be very different to its peers, meaning that if the manager leaves, the price can quickly fall either back into line or below the peer group,” he says.
As it happens, the fund’s rating has fallen back broadly into line with its immediate peers in the IT UK Smaller Companies sector, with Downing Micro-Cap sitting on 0.4% discount and Miton UK Micro Cap on a 2.5% discount.
“Philip was very closely related to this fund and its strategy,” adds Elliott. “He espoused its launch passionately following his recruitment from Investec in 2014 and was instrumental in its unique capital structure, whereby capital is returned to shareholders after the fund has grown above £110m. This allowed him to run a concentrated portfolio of micro cap stocks and maintain his investment discipline.”
In its 2018 rebalancing of its model portfolio, Winterflood replaced the River & Mercantile UK Micro Cap trust with The Mercantile Investment Trust in the UK equities section of its portfolio for its mid and small cap exposure. Trading at a 9% discount at the time, it felt the Mercantile Investment Trust represented a better value opportunity (versus the premium the R&M UK Micro Cap was trading at the time).
Greenwood, who never held the fund, says things can go the other way. That is a badly performing trust can see its discount narrow if a poorly performing trust gets taken over by new management.
A most recent example of this would be the Aurora Investment Trust. Having been a serial underperformer in the IT UK All Companies sector, since Phoenix Asset Management took over the trust in January 2016, the fund has undergone a complete transformation under new manager Gary Channon. As such it has moved from a 17% discount in April 2015 to a 3% premium, with the trust ranked second quartile over one and three years.
On the road
For Elliott, the key now for River & Mercantile is to get the new manager, George Ensor, out on the road meeting shareholders.
“We retain our belief that there is a large opportunity in the micro cap segment of the UK market for a genuinely active manager to add considerable value as a result of the market inefficiencies,” says Elliott. “In addition, we believe that River & Mercantile UK Micro Cap’s structure provides it with a huge advantage in exploiting those opportunities.
“We have not had the opportunity to meet George Esnor yet but note that he has been involved in the fund since its launch. It is fair to say that he has a tough act to follow and we would expect River & Mercantile AM to be proactive over the next few months in allowing him to meet shareholders.”
