The smaller end of the investment spectrum has had a bleak run over the past four or five years. The AIM index has been at rock bottom when compared to the All Share and other major global indices, with the FTSE AIM index down 21.3% over five years (to 30th April) and FTSE100 up 10.9% over the same period according to the LSE, the difference is stark.
There are a number of reasons for this more than 30 percentage point differential. Larger investors have been moving away from UK equities in general – as a reflection of the current economic picture – but those that are keeping their toe in, are favouring the big companies that have international outlooks (which is the opposite of many AIM and mid-cap stocks that have a more inward UK domestic focus). As the bigger investors sell out, a negative feedback loop kicks into gear, which means smaller companies’ share prices fall making them less attractive and driving down their prices – and the divestments – even more.
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For medium and smaller investors, the economy wears heavy, and again there is a flight to (perceived) quality, with smaller players dumping small caps in favour of larger businesses, which adds to the feedback loop. Moreover, a lot of the smaller companies are more reliant on bank debt and have been punished by rising interest rates, which has forced already stressed post-Covid finances even more, and small- and mid-cap companies are more often than not in the sectors that have been most punished by cost-of-living hikes and reducing consumer demand.
This has been a significant headache for small cap fund managers, and regardless of how good a job they are doing , they are being battered by storms well beyond their control, but despite the reality, trotting out the promise of ‘jam tomorrow’ is starting to echo a bit thin.
However, one fund manager seems to have found the pot of jam, in the last year, despite winding-up the fund, Richard Bernstein manager of the AIM-listed GBP84m Crystal Amber Fund [LON:CRS] leads the line in terms of performance over the last year in the Association of Investment Companies’ UK Smaller Companies sector with a +37.64% (share price) total return over one-year (to 29th April) when compared to a sector average performance of +9.2%.
Crystal Amber Fund realising assets through wind-down
It is, sadly but a swansong for Crystal Amber, as following a vote against continuation in December 2021, ratified three months later, the board decided that it would return the fund’s capital to investors through timely disposals, and it has been going through a process of wind-down for the past two years. The performance returns have been framed by the realisations from the wind-down process.
But the fund hasn’t yet written the last page of its story, as last October Crystal Amber reinstated its management fee for this year and beyond, as its management concluded that it would take much longer to wind-down than first anticipated, which does in the coming months still leave the door open for further positive returns.
In its last set of results for the year ending 30th June 2023, Crystal Amber reported net asset value per share had decreased by 4.6% over the period while the company also returned GBP37.5m to shareholders, bringing total returns of capital to more than GBP100m.
As the fund continues its wind-down, Bernstein sounded an optimistic note, having reduced the portfolio from nine companies to six, and holding debt in two positions, the fund’s management sees its remaining portfolio as a special situations play. He believes value can still be realised, despite the overall direction of the market, and the remaining holdings offer significant upside potential.
In Bernstein’s assessment, the ongoing exit process can give back shareholders significant, uncorrelated returns that can replicate the strong performance it has had in the last year. So, despite not making any new investments – although maintaining the mandate to increase stakes in existing investments – Crystal Amber could still provide a profitable curtain-call.
Bernstein is also chief executive of Eurovestech, a pan-European development capital fund focused on high technology enterprises as well as being manager of the Guernsey-based investment trust. He is assisted by solicitor, Jonathan Marsh, who is also lead counsel at Vitol.
A closed-ended activist fund
Crystal Amber is a completely different beast to many of the other funds in the UK Smaller Companies sector (which in some way explains its divergence away from the average fund in this sector, but also the way the fund has ended its run) in that it’s primarily a closed-ended activist fund that isn’t scared of using its financial clout in the companies it holds to execute real operational and strategic changes. It does this as it thinks it will help turn around the investee company’s performance and further its objectives to provide its shareholders with sustainable, attractive total returns uncorrelated to any indices and even in this wind-down process can still realise value.
Historically, the fund started the process with a hard scry, conducted though its internal screening process and its targets are valued with a focus on their replacement value, cash generation ability and balance sheet strength. Bernstein explained that Crystal Amber looked at a potential investment opportunity ‘as is’ but then envisaged, with a bit of prompting, what the company ‘could become’ to maximize the fund’s shareholder value.
Usually, the fund tested the water with a small stake and observed what transpired. Once management understood the rhythms and patterns of the company, they often sought an initial formal engagement with management – not to criticise, but to suggest. Conversations are conducted at C-suite level and with the investee company’s NEDs. This helps Bernstein and team build a picture of what the company is all about and then the fund might engage a third-party to do more investigation.
Managers actively ‘stay close’
The managers seek to ‘stay close’ to their investments and engagement is an ongoing process, not just undertaken to tick a box, but as part of the investment philosophy. As to what kind of company Crystal Amber looked to invest in, the managers think it’s important to identify companies that were largely passed over by the market, but had hidden intrinsic value that could be unlocked, to realise what the fund sees as the real value and potential of the company. The fund isn’t looking at the micro-end of the market – it needs to take a position that is big enough to be able to actively engage, but not own the lion’s share of the company – so primarily hunted for value in companies in the GBP100m to GBP1bn range and was prepared to hold unlisted companies.
Crystal Amber does not run investment on a time-scale basis, and sometimes will hold onto a position for a significant amount of time whilst it works with management to unlock trapped value and guide strategy, which explains why the wind-down is taking longer than anticipated. A lot of the engagement process is behind closed doors, but on occasion, Crystal Amber will opt for stick over carrot and go public with its concerns as banknote printer, De La Rue [LON:DLR] found out last year.
When investing in undervalued companies, the fund aims to promote measures designed to correct the undervaluation. It will seek the co-operation of the investee company’s management as far as possible. Where a different ownership structure would enhance value, the fund will seek to initiate changes to capture such value. The fund may also seek to modify existing capital structures and introduce greater leverage or seek divestiture of certain businesses of the investee company.
However, most of the time the management of the companies in which it invests welcome advice and constructive criticism and often take that advice on board, as Crystal Amber makes it clear that its working on the same team as management to make the company better and stronger.
An unconventional approach
It’s a very interesting and unconventional approach, but not without its risks which sometimes don’t pay off – given the shareholders’ vote to discontinue – but the theory and philosophy is very much different to the run-of-the-mill smallcap fund. One-year performance has seen Crystal Amber top the AIC charts, however, over the longer term, Crystal Amber has lagged the sector, returning -23.6% against a positive return of +18.8% for the sector average over five-years, and over 10-years returned +11.2% against a sector average of +80.7%. That said, Crystal Amber’s five-year dividend growth p.a is 31.95%, again placing it at the top of the pile in its sector.
The fund is trading at a discount to premium of -30.4%, the fourth highest in sector, where the average is -11.8%, and it’s about median in sector in terms of ongoing charges (excluding performance fees) at 1.56% where the average is 0.92% (there are some pretty cheap funds in the sector).
Crystal Amber Fund top five holdings
| Investment | Weighting | Sector |
| Morphic Medical NASDAQ:MORF | 23% | Healthcare |
| De La Rue LON:DLAR | 17% | Commercial Services |
| Prax Exploration & Production (formerly Hurricane Energy) |
3.9% | Oil and Gas |
| Sigma Broking | 3.4% | Financial Services |
| Allied Minds | 3.3% | Private Equity |
Source: Crystal Amber as at 30th June 2023
The top-five holdings (as at end-June 2023) accounted for more than 50% of the portfolio and three are no longer listed companies, which gives you an idea of the style of the fund.
It is coming to the end of the line for Crystal Amber, but in the next twelve to twenty-four months the fund could reel-back previous errors and end up returning a tidy sum to investors. Even in the wind-up period, Crystal Amber does offer a fresh perspective on smaller companies investment and its fearsome activist approach means that it will come out swinging on behalf of its shareholders for as long as it remains in business.
