Fund managers are generally not good at running businesses. If they were, they would be in the wrong job. The objectivity and broad perspective of a fund manager is potentially of great value to a company, but requires the discipline of the private-equity specialist to justify the effort. Here, fund managers do add value through “active” involvement in the management of businesses they control, in contrast to the “passive” approach of most professional investors.
Setting up shop
This makes Odyssean Investment Trust (LSE: OIT) the perfect vehicle for an active approach. Stuart Widdowson, its lead manager, spent five years at HgCapital before joining Strategic Equity Capital, a trust focused on UK smaller companies whose performance he turned around. In 2017, he left to set up Odyssean with Ian Armitage, who had been key to the success of HgCapital, and Ed Wielechowski, another Hg veteran.
With the backing also of Christopher Mills of the North Atlantic Smaller Companies Trust, Widdowson raised £87m in a 2018 stockmarket flotation for a “private-equity style” strategy of investing in 15 to 20 stakes in companies with market values of between £100m and £1bn. These were to be “misunderstood companies with self-help potential”, in which the team’s “active engagement could support long-term value growth”.
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Their record and differentiated style looked promising but finding the right investments could not be rushed. In 2019, Widdowson was forced to take nine months’ compassionate leave and UK equities have performed poorly this year, especially small caps. Odyssean, it seemed, was as unlucky as its near-namesake in the Iliad. Like Odysseus, though, Widdowson and the team have proved adept at making the best of difficult circumstances. Though its benchmark small-cap index was down 16.7% from the trust’s launch to mid-year, Odyssean gained 3.5%. “Most of our outperformance has come in difficult markets,” says Widdowson, “but we are not out to beat the index, just to make money.” Bids for three companies in the portfolio in the last 12 months, at an average premium of 40%, have helped. Those for Consort Medical and Huntsworth were followed in August by a bid for Odyssean’s first investment, translation services provider SDL.
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SDL, says Widdowson, was underperforming when they bought the shares. As a result of a number of problematic acquisitions and a failure to streamline operations, margins were only 8%, despite good intellectual property and high barriers to competition. Two years on, margins were close to the mid-teens and SDL agreed to a merger with rival RWS, more than doubling the value of Odyssean’s original investment.
Skewing towards growth
The portfolio now consists of 19 holdings, “companies with good technology that are trading below intrinsic value. We are not interested in very cheap, dying businesses,” says Widdowson. He expects to find five new investments a year, which will not be a problem this year. Technology, media and telecoms account for over 30% of the portfolio, industrials over 20%, business services 18% and healthcare 13% – the profile of a growth strategy rather than a value one. Net cash is 10%, leaving room for one or two new holdings “where we can double our money in three to five years”. The team is patient: “We often shadow businesses for... four years before investing.” Widdowson says the strategy has capacity for £500m of investments but extra issuance is impossible until his shares, currently trading on an 8% discount to net asset value (NAV), reach a premium. With this discount, Odyssean’s record to date, the outstanding record of the managers and mispricings more common than ever in the small-cap sector, Odyssean’s shares are a bargain.
