A pair of shareholders in Ken Wotton’s Strategic Equity Capital trust are ramping up calls for it to be wound up at the end of the month, following multiple mis-steps by the board.
In an open letter to the board of directors, long-term shareholders Ian Armitage and Jonathan Morgan set out their rationale for why they believe shareholders should vote to discontinue the trust at the extraordinary general meeting later this month.
The pair, who own 7.7% of the £178m trust between them, claim the board’s decision to sanction multiple changes to the investment team and drop the discount target and control mechanism have taken the trust from a “strong and stable position” to one that is untenable.
As a second option Armitage and Morgan have floated the idea of a “roll-over option” for investors who want to remain invested in the new strategy under Gresham House, who took over the mandate last May.
“All of these scenarios can be avoided if the board were to directly address the issues we have raised,” they wrote. “However, we are mindful that this EGM has been called as a direct result of the absence of any constructive discussions between the board and the increasing number of shareholders who are uncomfortable with the current discount and management situation.”
Lead manager Ken Wotton too busy running existing trio of funds
The trust currently trades on a 16.3% discount to NAV, according to data from the Association of Investment Companies, much higher than the UK Smaller Companies’ 5% discount. Over the past five years it has traded on a discount to NAV greater than 10%, Armitage and Morgan noted.
In addition to the widening discount the pair pointed to the “sizeable overhang of shareholders who are not happy” with the board’s decision to appoint Gresham House as the trust’s manager.
Last March the board announced it was swapping existing manager GVQ Investment Management for small cap specialist Gresham House in a bid to enhance the trust’s marketability and attract new investors to contend with the double-digit discount.
Though the incumbent managers Jeff Harris and Adam Khanbhai transferred to Gresham to continue running the mandate, Harris left four months after joining, leaving Wotton to step up and take the reins.
Specifically they raised concerns about Wotton (pictured) being too busy managing his three existing funds, including the £283.9m Gresham House UK Micro Cap, to devote his full attention to the trust.
Under Wotton the trust has done slightly better than the IT UK Smaller Companies sector, returning 38% versus the 36.8% average. Otherwise it has been consistently in the third quartile over all major time frames, returning 29.5% compared with peers’ 73.4% over five years.
If continuation vote succeeds board composition must change
“Given the current situation, we believe the simplest option is that Strategic Equity Capital is discontinued, and that is the option being presented to shareholders at the 30 March meeting,” Armitage and Morgan said.
“As an additional measure, as discussed with Strategic Equity Capital’s lawyers, a special resolution has also been included on the agenda allowing for the establishment of a roll-over option for those shareholders who are attracted to the idea of investing under the new strategy with Gresham House.”
In the event shareholders vote to allow Strategic Equity Capital to carry on until the next AGM, Armitage and Morgan said a “strict discount control target and mechanism” must be reinstated “as a matter of urgency”.
Additionally “given the poor outcomes of the decisions made by the board” the pair said they would be calling for changes to its composition.
The board currently consists of five non-executive directors and is chaired by Richard Hills who is currently a director of the Henderson International Income Trust and JP Morgan Multi-Asset Trust.
Responding to the letter a spokesperson for Gresham House said: “Gresham House was only appointed in May 2020 and is focused on fulfilling this long term investment mandate utilising its extensive investment resources and track record in this area of specialist investing whilst working with the board to act in the interest of all shareholders.
“A resolution for the continuation of the company was passed comfortably very recently on 11 November 2020. There has been no change in the stated investment strategy since Gresham House’s appointment and this is set out clearly in the recent SEC interim report.”
