Investment Manager’s Review

The net asset value (“NAV”) total return for the Company for the six months to 31 December 2023 was 7.3% while the share price total return was 12.9%. By comparison, the UK smaller companies sector as represented by the Deutsche Numis Smaller Companies plus AIM (ex investment companies) Index (the “reference index”) delivered a total return of 5.5%.

Equity Markets

We were pleased to deliver outperformance, despite equity markets remaining volatile and challenging, with macro top down factors continuing to dominate for much of the period. The second half of 2023 rounded off two years of dramatic interest rate rises to combat inflation, geopolitical instability, and fears around the risk of a global recession; although it has yet to materialise. The end of 2023 looked to signal the end of rising interest rates, however the pace of reversion is still very much in question, and “higher for longer” is a possible macro environment. With inflation now at a more manageable level, that pathway will likely be driven by economic growth and labour markets. 2024 is also a big year for election voting globally, with 40% of the world’s population voting in elections this year, including the USA, the UK and India. There is a general consensus that UK equity markets are cheap relative to others on a variety of metrics and around two UK quoted companies a week are being acquired either by private equity business or other corporates, as merger and acquisition (“M&A”) activity has increased. It is likely that this will continue to feature in 2024, as interest rates fall, driving increasing quoted company M&A activity. Both interest rates and bond yields are hopefully at, or close to, peaks and fears of a resurgence in inflation are diminishing. This provides a better backdrop for equity markets, and for growth investing. It is worth remembering that the UK equity market is very international in its exposure, and in the portfolio almost 50% of underlying revenues are generated overseas. This delivers some revenue diversification for the portfolio. We have been, and will continue to remain, true to our investment process which has been consistent through five economic cycles; with company fundamentals at its core. Throughout the period under review, company results have been resilient, the quality focus allowing them to protect margins and profits. We have continued to find new ideas, assisted by our stock screening tool “the Matrix” which helps us identify quality growth and momentum companies throughout the cycle. We hope the stuttering progress of equity markets in 2023 should become smoother in 2024 as the inflation and interest rates headwinds retreat. This in turn should encourage a return of net buying by investors and a narrowing of discounts within the investment trust sector. 2023 was a challenging period for smaller companies, but the outlook for 2024 looks more favourable.


The NAV total return for the six month period ended 31 December 2023 was 7.3%, outperforming the total return of 5.5% from the reference index. Whilst across the portfolio we have not been totally immune to macro headwinds or earnings downgrades, we have been very pleased at the earnings resilience of the Company’s investments, particularly the larger holdings. At the time of writing, in the current top 10 holdings, eight had upgrades to earnings expectations when they last reported, with the other two expectations remaining unchanged.

Total returns to 31 December 2023

6 months


1 year


3 years


5 years


10 years


 NAV +7.3  +1.5 -16.2 +25.5 +81.7
 Share price +12.9 +1.9 -23.3 +22.6 +63.3
 Reference index +5.5 +3.2 -3.3 +24.0 +50.3
Peer Group weighted average (NAV) +6.6 +4.6 +3.2 +31.0 +77.4
Peer Group weighted average (share price) +9.6 +4.8 -3.4 +31.0 +78.6

A) Considered to be an Alternative Performance Measure.

B) Deutsche Numis Smaller Companies including AIM (ex investment companies) Index, prior to 1 January 2018 Numis Smaller Companies (ex investment companies) Index. Past performance is not a guide to future results.

The five leading performers during the period were as follows: Ergomed (101bps contribution) - There was a recommended cash offer from private equity group Permira, representing a 28% premium to the prior closing price. We no longer hold this position.

Ashtead Technology (89bps contribution) - The company continues to trade strongly and rounded off a year of strong execution with a materially earnings-enhancing acquisition of ACE Winches that together prompted a 25% upgrade to FY 24 earnings. The acquisition is consistent with the company’s M&A strategy, consolidating a fragmented mechanical solutions market, expanding its range of products, services and geographical footprint, and transitioning an oil and gas focussed business towards offshore renewables. The outlook for growth remains strong and the company has increased its share in a growing offshore energy and renewables market. We have continued to add to this position as the company has shown strong execution.

Hill & Smith (54bps contribution) - The company has enjoyed continued strong momentum in the US, coupled with resilience in the UK. The US exposure generates 73% of operating profit, which is driven by a compelling infrastructure market. Management has a clear strategy of organic revenue growth, supplemented with M&A, and is executing it well. This continues to be a top holding in the portfolio. Hilton Food (54bps contribution) - This was a reassuring period of reporting for this long-term holding, with the inflation-driven pressures on margins from 2022 well behind it. The defensive characteristics of the company were evidenced. The company has also made some interesting new customer wins in Singapore and Canada, driving further growth opportunities. The share price is supported by an attractive dividend yield and a resilient earnings profile. The combination of topping up the holding and strong performance means this once again is a meaningful position in the top 10.

Paragon Banking (52bps contribution) - The shares demonstrated strength, particularly near the end of the period, the company having reported in line with expectations and evidencing its resilient business model and high credit quality, despite external macro-economic conditions driving some market concerns. The balance sheet exhibits strength, with support from retail deposits, and the business continues to deliver attractive returns and cash generation. The share price valuation remains attractive, with a strong dividend yield. Other notable strong performers included: Smart Metering Systems (49bps contribution) - There was a recommended cash offer from private equity firm KKR, representing a 40% premium to prior closing price. Diploma (48bps contribution) - Diploma’s FY23 results showcased a stellar performance in the face of weaker peer reporting throughout Q3 and a weak macro backdrop, demonstrating the power of the company’s decentralised, increasingly diversified model. Management gave positive commentary on expectations into next year and the balance sheet is strong enough to execute on an active pipeline of M&A opportunities.

Cranswick (40bps contribution) - The barriers to entry for competitors to Cranswick are increasing due to its high quality customer base, market share increases, and capital investment that has delivered operational improvement. The H1 2024 results highlighted these strengths. Cranswick will continue to pursue investment in capabilities and production expansion, and also partner with its key customers to deliver growth in underdeveloped opportunities such as pet food. The company has a strong balance sheet, good cash generation, an attractive opportunity pipeline, and the ability to invest to widen the capability gap versus its peers. The five worst performers during the period were as follows: Big Technologies (-90bps contribution) - There has been unpredictability in the timing of contracts and a year of no major wins. This resulted in a pause in the company’s growth rate and downward revisions to earnings estimates. We reduced the exposure to this company through the period. XP Power (-74bps contribution) - Management’s growing confidence that the company could trade its way out of a difficult environment had been misplaced, and in early October it issued an update describing weak orders, a decline in China demand, and order postponements into 2024. This resulted in substantial earnings downgrades for this year and a risk of the company breaching its loan covenants, which made equity issuance likely. This, together with earnings downgrades, was a deterioration in the investment proposition and we exited the position.

Team17 (-67bps contribution) - The company issued an unexpected update in November that disappointed the market, with margins much lower than hoped, prompting a reset of margin and earnings expectations. 2023 was a challenging year for video gaming companies, with post-Covid content releases driving competition and competitive pricing. We exited the position. Auction Technology (-49bps contribution) - The full year revenues came in lower than expected, driven by a deterioration in end-market trends. The weak macro environment led to the business cutting guidance for next year’s organic growth to a range of 5-8%, compared to consensus’ mid-teens estimate. Whilst some areas of the business are proving anti-cyclical as expected, there are others facing cyclicality and asset price normalisation post Covid which is compounding these pressures given the revenue model. We continue to believe the company has a leading market position, and its execution on increasing take rate through proliferation of value added services is supportive of the longer term outlook. CVS (-44bps contribution) - The shares struggled to perform following the Competitions & Markets Authority (“CMA”) review into the vet sector. The CMA is looking at the rate of inflation in vet services and the ability of households to access information. Pricing increases for CVS have not been out of line with its inflationary cost base, and margin resilience has come through operational self help. CVS has multiple services that it cross-sells, and different branding across its practices, which is likely to form part of the CMA review. We are confident the outcome of the review will not be too damaging or require much operational change for CVS. The results are due in Q1 of 2024. We continue to hold a position in the company.

Dealing and Activity

Seven new holdings were added during the period; Ashtead Technology, Hunting, XPS Pensions, Volex, Premier Foods, Chemring and Johnson Service. Aberdeen-based Ashtead Technology provides key survey, mechanical and monitoring equipment and services for the global offshore energy and renewables market. It forms an important part of the subsea supply chain, and the investment case also provides differentiated exposure to global energy transition. The management team has a good track record of execution as it scales the business organically and through acquisitions. The company is a market leader in a thriving sector with strong customer relationships and pricing power with good margins from value-add services, all serving to drive strong growth. Momentum has been strong as the company demonstrates the ability to scale the fleet with growing capital expenditure investment. The balance sheet has significant fire power for deals and we believe that there are a number of acquisition options open to the company.

Hunting is a global engineering specialist manufacturer, focusing on high quality equipment for the energy industry. It manufactures components, technology systems and precision parts. The company is a high quality business operating in a cyclical industry, with oil and gas capital expenditure cycles being an important factor. Hunting has proactively diversified over recent years, through products, end markets and geographies. That helps the business control its cyclicality going forwards. Quality aspects come from its leading market positions, strong reputation, quality products and service and IP protection. The company has a strong balance sheet with marginal net debt, giving it flexibility to invest. End markets look to be in supportive territory after many years of underinvestment.

XPS Pensions is one of the largest pensions consultancy and advisory businesses in the UK. The nature of its services means its business is highly recurring and should be non-cyclical. Whilst the company has demonstrated its ability to grow organically in a lacklustre market, regulatory changes and pension market volatility have caused an acceleration in activity and demand from clients. XPS has been taking market share and the supportive end markets give it additional support to grow revenues, but also to gain new customers. There is potential for margin expansion from a combination of a more attractive mix shift in services, control of lower profitability accounts, implementation of IT administration systems and wage inflation under control; all providing the business potential for operational leverage.

Volex is a global market leader in performance-critical components and assemblies for use in specialist demanding solutions. It has transformed its strategy and management team, and re-positioned the business, and the refreshed strategy is bearing fruit. The company looks well positioned to drive more consistent organic growth, complemented by earnings accretive acquisitions. The mix of customers, geographies and end markets is continuously improving, reducing the cyclicality and customer concentration. Growth is supported by structural growth end markets such as data centres, supply chain regionalisation and electric vehicles. Acquisitions should enable the company to move further up the value chain, making it more embedded with its customers.

Premier Foods has made considerable progress over the last five years in reducing debt, resolving its pension issues and, importantly, generating consistent growth from its brands. Financial gearing has materially reduced and is expected to fall further, reflecting the strong cash generative nature of the business. The company has been investing to support brand growth and supply chain investments. The combination of strong brands, well defined domestic and international growth opportunities, and a proven track record in innovation and execution should serve to sustain the growth and momentum the business has been delivering.

Chemring is a niche aerospace and defence company with leading positions in the supply of cyber-security and digital warfare products to UK Defence and Homeland Security markets. The company has a number one market position in the supply of countermeasures to military aircraft. It is undergoing an extensive investment programme to enhance safety and operational efficiency across its countermeasure and energetics facilities. The business delivers profitable growth through its differentiators, such as intellectual property, niche technology and high barriers to entry, enabling attractive margins. These, along with strong and enduring customer relationships, provide a strong platform for future growth. The business enjoys good visibility with a strong order book. Russia’s invasion of Ukraine has seen a sea-change in opinion towards defence spending in the West. The company has also seen a reset in terms of how the sector is viewed from an ESG perspective. The balance sheet is robust with strong ongoing operating cash generation, providing a platform for future investment, both organic and inorganic, and sustainable, growing dividend payments.

Johnson Service is a UK textile rental and services business. It rents and launders workwear, hotel linen and tablecloths to commercial customers, across the industrial and consumer end-markets. In both the workwear and hotels and restaurants segments of this market, the company is the largest service provider in the UK. Despite providing a relatively commoditised product and service, the company has consistently delivered organic growth ahead of both its market and its largest peers. It has sector-leading margins and returns comfortably ahead of its cost of capital. Trading was, unsurprisingly, affected by the Covid pandemic but despite ongoing macro uncertainty the company is now better placed than it has been at any point since the start of the pandemic.

We exited 10 positions during the period; Ergomed, FDM, Focusrite, Future, GB Group, Marshalls, Motorpoint, Team 17, Watches of Switzerland and XP Power.

The decision to exit Watches of Switzerland reflected a change in our investment case following Rolex’s decision to acquire the Swiss retailer Bucherer. Our investment case was predicated on the company opening stores across the US and Europe and building sales in all territories. Key to that was a very close relationship with Rolex, ensuring strong supply as the partner of choice, and there is now risk associated with this. We exited the holding in XP Power when we concluded that management’s confidence that the company could trade its way out of its high net-debt-to-EBITDA ratio was misplaced and an equity issue was necessary. Along with recent earnings downgrades, this means the value proposition has deteriorated and we took the decision to sell the holding.

Team17 experienced an unexpected margin reset and poor growth outlook coupled with a change in CEO. Future faces short and long-term uncertainties. In the short term it has limited visibility on the timing of audience recovery, a weak macro environment which continues to weigh on advertising spend, and its content portfolio leaves it more exposed to the macro environment than other publishers. Longer term, there are concerns around the organic growth prospects and execution risk on the new CEO’s strategy for the business.

We also exited positions in FDM, Focusrite, GB Group, Marshalls and Motorpoint where momentum was lacklustre and we felt that it would take a long time to return amidst a subdued outlook for the various end markets. Ergomed received a takeover approach from a private equity business and we took profits.


There was good growth in dividend receipts during the period, aligned with our sentiment above that the reporting overall in the portfolio, and the earnings growth being delivered, remain strong. It is notable that within the current top ten holdings, the rate of dividend growth has remained attractive. Excluding the outlier of 4imprint, which has once again delivered exceptional dividend growth, and Ashtead Technology, which pays a very small dividend, the other eight holdings are averaging 13% dividend growth forecasts for 2023. Although lower than at the same point in 2022 (assisted by a Covid recovery in dividends), this is a very healthy growth forecast, especially given the ongoing tougher economic climate. We believe this is a good signal of management confidence in business outlooks. Big Technologies, Auction Technology, Marlowe and LBG Media are the only continuing holdings in the portfolio which do not pay dividends. The percentage of non-payers has reduced to 4% of the portfolio, from 12% when we last reported. Given the strength of the income stream from the portfolio as a whole, we are comfortable with some exposure to non-dividend payers.


The prospect of interest rate reductions in the near future and the lowly valuation of UK equities should offer the potential for sustained market gains in 2024. One catalyst to support this would be inflows into UK equity funds, after a long period of outflows and, in the investment trust sector, this demand helping to narrow discounts. The derating of equities, and in particular smaller companies in the UK, has already happened. It actually happened in 2022 in anticipation of a recession in 2023, yet the economy proved to be more resilient than expected. Small and mid cap companies in the UK are attractively valued relative to large companies, whilst the UK market overall remains cheap on a global basis and relative to its own history. The recessionary question mark in many geographies still looms as we move through 2024. A key driver for 2024 is when the downward leg of the interest rate cycle should begin, with growth now the focus rather than inflation. Whilst the timing of interest rate reductions are hard to predict, equity markets have historically risen once interest rates start falling. Whilst interest rates look to have peaked, the trading environment for companies is likely to continue to be difficult given lacklustre economic growth projections. This is the time in the cycle to stick to ‘quality’ companies. They are more likely to be successful in navigating the more difficult macro environments and can defend earnings. We focused on earnings resilience across the portfolio throughout the period, however the top-down macro environment has continued to dominate style dynamics within markets. We have seen that ease in recent months and, looking into 2024, we hope company fundamentals return to becoming the more important drivers of returns. The investment process, including the Matrix, has been helpful at focusing on which companies are delivering superior growth momentum characteristics through economic cycles, and the outcomes of this can be seen in the trading activity referenced above. For investors, there are important elections being held in 2024. The US Presidential Election in November, and probable General Election here in the UK. Much can change in a year but, as we move through the summer, we expect increasing deliberations over what differing scenarios may mean for financial markets. The importance of the US election is further increased with the US being the global growth driver, given the recent waning of Chinese influence. Meanwhile, concerning areas of conflict remain ongoing globally, which create further tail risks to economies and markets. The level of discounts we are seeing across the investment trust sector has been painful for existing shareholders, but it has created an opportunity for good share price returns when markets recover. We thank shareholders for having had the patience to sit out this difficult backdrop for our quality, growth and momentum investing and, while market timing is difficult, we feel the most challenging top-down macro environment is behind us. The outlook for smaller companies investing remains strong, particularly given the current valuation of the market, and the interest rate and inflation environment suggest a more benign investment background in prospect. We remain optimistic about the prospects for the portfolio.

Important information

Risk factors you should consider prior to investing:

  • The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
  • Past performance is not a guide to future results.
  • Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
  • There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
  • As with all stock exchange investments the value of the Trust shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
  • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
  • The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
  • Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
  • The Company may charge expenses to capital which may erode the capital value of the investment.
  • The Alternative Investment Market (AIM) is a flexible, international market that offers small and growing companies the benefits of trading on a world-class public market within a regulatory environment designed specifically for them. AIM is owned and operated by the London Stock Exchange. Companies that trade on AIM may be harder to buy and sell than larger companies and their share prices may move up and down very sharply because they have lower trading volumes and also because of the nature of the companies themselves. In times of economic difficulty, companies listed on AIM could fail altogether and you could lose all your money.
  • The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
  • Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.

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