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Rights & Issues sweeps market for smallcap opportunities


It’s been an up and down year for the Rights & Issues Investment Trust [LON:RIII]. The closed-ended investment company, part of the Jupiter Asset Management stable, was trading at 2,315p at its apex last July. However, by October it was down at 1,865p.

In February prices were back at 2,095p, but then the fund had another backslide. Part of the ride can be explained by a change of driver in the cab.  In September 2022 Simon Knott, who had been the fund manager for nearly 40 years retired and was replaced by Jupiter’s Dan Nickols and Matt Cable.

Nickols and Cable are both part of Jupiter’s small-to-mid cap team, with Nickols becoming part of Jupiter on the acquisition of Merian Global Investors in 2017 after starting in the industry at Old Mutual in 1997. Nickols ran the Jupiter Smaller Companies fund from January 2004 to the end of April 2022, generating returns of 857.6% against a benchmark return of 463.6%

Cable joined Jupiter in 2029 with a background in smaller cap investment at M&G and joined Nickols in R&IT boiler-room. Knott is a hard act to follow, having grown the net asset value (NAV) of the fund by 10,371% during his tenure, against 610% return from the FTSE All-Share, but having been at the helm since 1983, Knott will be keeping a watchful eye on the investment trust as non-executive director. Knott was never an outspoken fund manager, and compared to many of the peers of his pedigree preferred operating in the background as opposed to the limelight.

Skin in the game

The investment trust, originally established in 1962 and an heirloom of the Knott family, converted from split cap to single class in 2016 and actively bought its shares back when the discount to net assets exceeded 8%. Chess-buff, Knott had skin in the game, with his family owning around 15% of the issued share capital, so he always had his interests closely aligned with the investors, and as a one-man band always managed to keep his costs low, which with Jupiter stepping-in as alternative investment fund manager will change.

As far as investment style is concerned, Knott was a ‘deep value’ smallcap specialist. Respecting the venerable nature of the investment trust, Nickols and Cable have been loath to make any major strategic changes to the way that the fund is managed, although, compared to the Knott-era the Investment Trust has a much-larger pool of expertise to call upon in the Jupiter group.

Nickols said: “A concentrated and high-conviction approach has been a hallmark of Rights and Issues over the years, and we plan to continue in that tradition. We expect the portfolio to remain concentrated, in the region of 20 to 30 stocks.”

He noted that the closed-ended structure of an investment trust brings the advantage of not having, as in an open-ended fund, daily flows of investor money. This means, Nickols explained, that the trust can cope with greater volatility and lower liquidity in the shares it holds. “It allows us to bring greater focus to bear. We can concentrate on a smaller number of our highest conviction ideas,” he said.

The fund’s objective is to exceed the benchmark index over the long term whilst managing risk. The benchmark of the fund is the FTSE All Share Index.

The fund will invest in equities with an emphasis on smaller companies, with UK smaller companies normally constituting at least 80% of the investment portfolio. UK smaller companies include both listed securities and those quoted on AIM.  The investment portfolio will normally lie in the range of 80% to 100% of shareholders’ funds.

Leverage free

Unlike many funds, and following on from principles set by Knott, R&IT will not leverage its holdings. The fund managers will deploy a blended top-down and bottom-up approach to stock selection. They use a macroeconomic framework which considers key UK and global economic indicators, which then determines their thematic and sectorial exposure over time. Jupiter says that the stock selection process: “is embedded in fundamental bottom-up research of companies, utilizing their own primary and third-party investment bank research to understand and assess the prospects for companies” and the fund managers will seek companies with high quality management teams with strong track-records of execution, and which are fundamentally mispriced.

The fund will neither be growth nor value under Nickols and Cable, and dependent on the market cycle may exhibit characteristics of both, Cable said that one of the changes the team would like to make is to reduce the concentration of the portfolio, reducing the Top 10 Holdings concentration down from about 85% of the total portfolio to around 70%.

Rights & Issues Investment Trust Top Five Holdings:

Company Industry % Holding
MacFarlane Group [LON:MACF] Packaging 11.9%
Vp Plc [LON:VP.] Equipment rental 10.93%
Colefax Group [LON:CFX] Furnishings 8.31%
Treatt [LON:TET] Chemicals 6.10%
Renold [LON:RNO] Engineering 5.44%

Source: Hargreaves Lansdown

The investment company closed trading on 6th June at 1,930p, up 1.4% since the start of the year, but down -15% from this time last year. The company’s shares have ranged between 1,862.5p and 2,315p over the last 52-weeks. The Rights & Issues Investment Trust has a market cap of GBP114.6m.

Always advocates of the smaller end of the market at The Armchair Trader, R&IT offers exposure to small, listed UK companies in a concentrated, but still diversified portfolio. Whilst small caps often are perceived as being riskier – and therefore more volatile than the giants of the FTSE100 – they tend to outperform larger companies over the longer term. This is due a variety of factors, but a key consideration is that it is intrinsically easier for a smaller company to grow, perhaps doubling or quadrupling in size, than it would be for a comparable company that is much larger.

As they say, a new broom sweeps clean, it remains to be seen the changes that Nickols and Cable will bring – positive or negative – to a long-standing, unique small cap offering.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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