Britain has been arguably the United States’ most reliable ally in defence and diplomatic affairs for decades, an (unequal) partnership enshrined in the term ‘The Special Relationship’. As Presidents and Prime Ministers have come and gone the Special Relationship has waxed and waned. Although it is important to the British press and a good selfie opportunity for the British PM, it is a lot less important to the US.
Bilateral trade between the US and UK has always been important. In 2021, US exports to the United Kingdom were USD61.5bn, a 5.2% increase from 2020. Going the other way British exports to the United States in 2021 were USD56.4bn, a 12.1% increase year-on-year; with a trade deficit in favour of the US of USD5.1bn, a 37.3% decrease, according to the US Office of Technology Evaluation.
Total trade in goods and services between the UK and US was GBP234.7bn in the four quarters to the end of 2Q22, an increase of 14.8% or GBP30.3bn from the four quarters to the end of 2Q21. The United States was the UK’s largest trading partner in the four quarters to the end of 2Q22, accounting for 16% of total UK trade, according to the Office of National Statistics.
The North Atlantic Smaller Companies Investment Trust (NASCIT) [LON:NAS] seeks to capitalise on this relationship, with one foot in each country straddling the Atlantic, and targets capital appreciation for its shareholders through investing primarily in companies within the UK and some exposure to the US.
NASCIT’s vintage harks back to the days of Ted Heath and Richard Nixon and was established in January 1973, but since 1982 (Thatcher-Reagan) has been managed by Christopher Mills, who also serves as chief executive officer and investment manager. Mills founded JO Hambro Capital Management with Jamie Hambro in 1993 acting as chief investment officer and Harwood Wealth with Alan Durant in 2013 until their respective sales in 2011 and 2020.
He has been principal shareholder of Harwood Capital Management LLP, NASCIT’s investment advisor, since 2011 and since he took the wheel NASCIT has delivered a total NAV per share of nearly 200x with the fund achieving compound annual returns of 13.3% since inception.
The investment trust invests in a portfolio of smaller companies principally based in countries bordering the North Atlantic Ocean and is not fussy as to what it will invest in as it seeks out small undervalued quoted and unquoted companies, on both sides of the Atlantic in accordance with its objective and investment policy.
It is an actively managed company. Mills said: “We’re a very specialist venture – and very hands-on. We don’t just sit back and watch our money from the side-lines; in 50% of our holdings, we have placed people on the board.”
He added: “We have a pan-Atlantic mandate; but we’re overweight UK at the moment.”
NASCIT invests in various sectors, such as pharmaceuticals and health care; industrial goods & services; technology & software; consumer products and services; banks; travel and leisure; energy; oil and gas; telecommunications; education services; insurance and real estate.
The investment trust describes itself as: “A Special Situations investment trust dedicated to a long-term capital appreciation objective,” and Mills said that the investment philosophy he follows is identifying stocks which trade at a significant discount to their intrinsic value.
Value investors achieve this by looking for companies on cheap valuation metrics, typically low multiples of their profits or assets, for reasons which are not justified over the longer term and according to Schroders, over the last 100-years a value investment strategy has a consistent history of outperforming index returns across multiple equity markets.
Bottom-up, stock specific
The fund’s methodology is bottom-up and stock-specific looking at market-leading businesses with low debt and quality management that show long-term sustainability and growth of cash flows and will hold between 40 and 60 companies. NASCIT will invest in liquid and illiquid holdings, but has defined exit strategy, and will invest and cross-invest in other investment funds. The fund considers companies with an enterprise value of between GBP10m and GBP250m.
Mills takes a private equity mindset into the management of funds, trying to find ways that through restructuring, reorganising, disposing of and acquiring bits and pieces of the companies he invests in value can be released; and NASCIT is a very active investor and willing to get dirt under its fingernails to unlock the potential of its investments.
“We look at a subset of companies,” he said, “all under GBP200m in value, and have a reasonably large team that can scour the markets for opportunities […] we sit though at least 200 company presentations a year.”
Thematic private equity mindset
Mills explained that the team follows a thematic approach, currently looking for companies that can benefit from an environment of high interest rates and are not exposed to – or insulated from – the negative sentiments in the markets. “We’re looking for undervalued platforms and all the businesses we invest in have net cash [in hand].” Being a significant shareholder himself, owning about 30% of the fund, Mills’ skin in the game means he is very aligned to the fund’s performance.
The fund benchmarks itself against the S&P500 Index (GBP Sterling) and is managed from London. It is closed-ended and on 30th June 2022 had a Net Asset Value of GBP691.31m The fund charges 1% of shareholders’ funds (as defined) on 31st January each year as management fees and has a performance fee of up to 0.5% of shareholders’ funds payable if the investment portfolio outperforms the Sterling adjusted Standard & Poor’s 500 Composite Index in the year to 31st January.
NASCIT’s top-five holding are:
|Oryx International Growth Fund [LON:OIG]||14.9%|
|EKF Diagnostics Holdings [AIM:EKF]||6.4%|
|Harwood Private Equity Fund V||4.9%|
|Polar Capital Holdings Plc [AIM:POLR]||4.4%|
|Harwood Private Equity Fund IV||3.7%|
On a sectoral basis (as at end-June) the fund had the following allocations:
The fund opened trading today (24th November) at 3,507.48p and has offered a -26.4% year-to-date return and a one-year return of -28.7%. NASCIT shares have ranged from 3,125p to 4,965p over a 52-week period.