‘Buy good businesses, sell excellent ones’: how this trust has made 60pc in four years

Odyssean’s managers have found a way to unlock the value they detect in promising smaller stocks – with spectacular results

In turbulent and worrying times for investors, exemplified by Wall Street’s entry this week into bear market territory, the search for safe havens comes to the fore. A fund that invests in smaller British companies may not sound like an obvious candidate – such stocks normally suffer disproportionately as investors seek safety in household names – but the one we cover this week stands out from the crowd in several intriguing respects.

For a start, the trust, Odyssean, is extremely concentrated at just 15 holdings and this gives it the scope not only to get to know them all thoroughly, but to influence how they are run. It is neither a “value” nor a “growth” fund; instead it seeks “quality” stocks that it judges to be fundamentally misvalued by the market.

Well, they all say that, you may be thinking.

Let’s look at what these words mean in practice.

The fund is concentrated in more senses than simply having a small number of holdings. The managers, Stuart Widdowson and Ed Wielechowski, invest only in sectors they know well thanks to their previous experience as investors in smaller companies, which spans a combined 33 years.

“We believe the best investment decisions are made from a base of knowledge and experience, and we will make the majority of investments in industry sectors that we and our advisers know well: TMT [technology, media and telecoms], services, industrials and healthcare,” they wrote in their annual report published last week. They also tend to invest outside the FTSE 250 index of mid-sized stocks. “We believe this market is less efficient, offering more opportunities to find mis-pricings,” they wrote.

When it comes to influencing businesses for the better, they said they liked to invest in companies that, “while good, are underperforming their potential and where we see the opportunity for constructive corporate engagement to unlock improved sustainable returns”.

“The spectrum of areas which can be improved is broad and includes operating performance, asset utilisation, overly complex business structures, strategic direction, poor M&A [mergers and acquisitions], and governance and pay,” they wrote. “Our mantra is to buy good businesses and sell excellent businesses.”

Both men have experience in investing in private companies and say they aim to apply a “private equity” approach to listed assets, partly through the engagement and focus described above but also via a long-term approach, typically over three to five years.

This gives their strategy of seeking improvement in the businesses they invest in the time needed to come to fruition. They seek holdings that offer “multiple independent drivers of value creation” that “management actions can unlock”. Such an approach, they say, “makes an investment case more secure and less exposed to single areas of uncertainty or misjudgment”.

Something else that should help to maintain the portfolio’s value is its focus on “quality” companies that offer high returns on capital, wide profit margins, good cash generation and low debt.

These desirable characteristics tend to go hand in hand with limited competition and strong pricing power, so it’s welcome that, in the words of the trust’s chairman, Jane Tufnell, its managers “focus on niche market leaders with strong positions in their supply chains”, which “should provide overall insulation against the worst impacts of inflation”. The portfolio also has “negligible exposure to the UK consumer, where leisure and retail companies are likely to see demand under pressure from rising prices”.

The fund’s approach seems to work. Not only has it outperformed rivals strongly since it listed in 2018

– it has gained 60.3pc (on a net asset value total return basis), compared with 9pc for the average smaller companies investment trust – but its holdings have frequently attracted takeover bids at large premiums to the prevailing share price.

Analysts at Investec, the bank, like the trust. “Given a proven, differentiated approach and unique portfolio, we regard Odyssean as a strategic investment and believe it has a natural role in improving portfolio diversification,” they wrote last week.

Questor says: buy

Ticker: OIT

Share price at close: 162.5p

Read Questor’s rules of investment before you follow our tips: telegraph.co.uk/go/ questorrules; telegraph.co.uk/questor