Oryx International Growth: Small Cap, Big Discount

Some investment trusts shun the limelight while others almost seem to go out of their way to make themselves unpopular. Small-cap specialist Oryx International Growth seems to fall into the latter camp.

Nevertheless, Oryx has an excellent track record and is trading at a whopping discount, which tempted me to have a closer look.

Key Stats For Oryx International Growth

• Listed: March 1995
• Manager: Chris Mills/Harwood Capital
• Ticker: OIG
• Recent price: 752.5p
• 10-year net asset return: +366%
• Indicated spread: 740p-765p (3.3%)
• Exchange market size: 150
• Market cap: £107m
• Discount to net assets: 26.4% (NAV as of 31 August)
• Costs: 1.68% OCF, 1.63% KID
• Gearing: 0%, 6% cash as of 31 March 2019
• Current dividend and yield: Zilch
• Year-end: 31 March
• Results released: Jul (finals) and Dec (interims)
• Sector: UK Smaller Companies
• Links: Website and Morningstar page

Oryx isn’t a member of the AIC, making it a little bit harder to research and compare to other similar funds. It also doesn’t seem to be signed up to one of three main paid research firms that specialise in covering investment trusts: namely Kepler, Edison, or Quoted Data.

Coverage on Citywire Investment Trust Insider is also pretty sparse, which suggests a lack of private investor interest.

It doesn’t pay a dividend, in a world where income has become an obsession. Indeed, it hasn’t paid a dividend in the last fifteen years as far as I can tell.

Oryx may have ‘International’ as part of its name but it sits within the UK Smaller Companies sector and has around 90% of its assets invested in this country.

Admittedly, Oryx was moved from Global Smaller Companies in the AIC’s sector shake-up earlier this year, but a look back at past accounts suggests the current high UK weighting isn’t that unusual.

Net asset values for Oryx are only published monthly and sometimes up to a month after the cut-off date. For a fund that is primarily invested in listed equities, and so can be easily valued, that’s pretty unusual.

The website is pretty sparse. Clicking on a link to “read about the fund manager and the rest of his investment team” takes you to a page that just says:

Christopher Mills is Chief Investment Officer of North Atlantic Smaller Companies Investment Trust plc, which is winner of numerous Micropal and S&P Investment Trust awards.

A hidden nasty

While the basic management charge of 1.25% for the first £15m of assets and 1% above that level doesn’t look too bad, there’s a catch in the small print.

A supplementary management fee of £250,000 has been paid for the last two years. This was originally a performance fee of £100,000 that was set up in 2005 if the investment manager waived its right to management options.

In 2013, it morphed from a performance fee to a discretionary supplementary fee, seemingly with no explanation, and it has risen by £50,000 every other year since.

Nice work if you can get it. While it’s just 0.17% of net assets, it leaves a bad taste in the mouth when you come across things like this in the notes to the accounts.

Any positives?

I’d forgive you for tuning out at this point, but I think there’s an interesting story here.

Oryx is ranked 4th out of 17 in the UK Smaller Companies sector over the last 10 years in terms of net asset returns. Its discount has widened a lot this year (from around 10% to over 25%) so it’s 7th in terms of share price returns.

It seems to be a steadier performer than most other small-cap funds. It’s up 4% in net asset terms over the past 12 months, whereas the average fund is down 6%.

And its discount of 26% is the highest of the 23 funds in the sector, where the weighted average is currently 10%.

Finally, there is the Chris Mills factor. He turns 67 next month, but Oryx is just one of many investment pies he has fingers in.

Mills, Mills, everywhere

Mills began his career at Samuel Montagu in the 1970s, where he helped complete a deal to merge Invesco with Brittania Arrow, and then he went on to co-found JO Hambro Capital Management in 1993.

He has managed Oryx for nearly 25 years and the North American Smaller Companies Investment Trust (NASCIT) for 35.

NASCIT and Oryx have several positions in common but NASCIT also owns 52% of Oryx and has assets of nearly £600m making it over four times the size.

Both funds have performed very well over the long term:

Annualised net asset returns to August 2019

Period	Oryx	NASCIT
1 year	4.0%	5.6%
5 years	14.2%	13.9%
10 years	16.9%	13.8%
Inception	10.5% (1995)	13.1% (1973)

Both NASCIT and Oryx trade at a similar discount. However, it’s unusual to see two fairly straightforward equity funds trade at a larger discount now than they did in 2009 in the aftermath of the financial crisis.

NASCIT has the odd-sounding brief of “capital appreciation through investment in a portfolio of smaller companies principally based in countries bordering the North Atlantic Ocean”. At its last year-end, NASCIT held 70% in UK equities, 18% in US Treasury bills (i.e. cash), and 10% in US equities.

Oryx doesn’t seem to have a stated benchmark, which is unusual these days, while NASCIT uses the S&P 500 and also quotes the Russell 2000. Both of these are US indices, which seems odd in light of NASCIT’s heavy UK weighting.

As an aside, I am little puzzled as to why both Oryx and NASCIT continue to exist as separate trusts, given their obvious similarities.

Mills owns Harwood Capital Management (Harwood being one of his middle names) which had assets under management of £4.5bn at the end of 2017. This firm has a range of private equity and property funds and also provides financing for small companies.

He also invested in Odyssean Capital which in 2017 launched Odyssean Investment Trust, run by the highly regarded Stuart Widdowson. And Mills tried but failed to raise £175m for an affordable housing fund called Multifamily Housing REIT this time last year.

If that wasn’t enough, he also sat on the UKIP front bench team for a few years and has been a sizeable UKIP donor in the past.

There is also a separate AIM-listed business called Harwood Wealth Management. Valued at just over £80m, it boasts Mills as non-executive and Oryx holds a £3.3m stake in it.

There’s more to Mills than I’ve covered here (his grandfather and then his father ran a circus, for example), but I felt that was enough to get started with. Either you’ll regard him as extremely well connected or far too busy to be managing an investment trust.

Investing style

Here’s the stated investment policy, lightly edited:

The Company principally invests in small and mid-size quoted and unquoted companies in the UK and US, targetting companies that have fundamentally strong business models but where there may be specific factors which are constraining the maximisation or realisation of shareholder value, which may be realised through the pursuit of an activist shareholder agenda by the Investment Manager.

Mills often manages to get board seats on the companies that Oryx and NASCIT invest in and he doesn’t appear to be shy of forcing change.

A Moneyweek article from last year quotes him as saying “it is easier to get things done nowadays, as investors are more inclined to support activists, but don’t want to do it themselves. In small, illiquid companies, activism is the only way out for larger investors. It may only take five calls to get something done. Companies don’t even fight.”

Oryx’s portfolio

Oryx’s top ten investments, accounting for just over half of its portfolio, are:

Overall, the portfolio is split:

• UK listed: 86.4% (42 positions)
• US listed: 0.6% (1)
• UK unlisted: 2.7% (7)
• UK unlisted debt: 1.9% (2)
• US unlisted: 2.6% (1)
• Net cash: 5.8%

Oryx says its typical number of positions is 40-60. However, of its 53 current positions with a non-zero value, 25 are less than 1% of net assets.

I’m usually not a big fan of trusts with long tails of little holdings like this as I find it’s a distraction when it comes to my investments.

The annual report has limited commentary on the top 10 holdings but seems to ignore the rest of the portfolio, so it’s not clear to me what Mills’ thinking is with these smaller positions. Perhaps he just takes them to get a foot in the door and to see whether it’s worthy of more serious attention.

There’s no sector information either, although NASCIT has a breakdown showing financial services, travel & leisure, healthcare, and industrials are the main areas of focus. I suspect that reads through to Oryx.

Portfolio turnover seems moderately high. Looking at the past two years, roughly 30% of the portfolio by value has been both bought and sold each year.

High charges and long-serving board members

I’ve already had a winge about the supplementary management fee but the ongoing charges figure of 1.7% is pretty high relative to other UK small-cap funds.

And the large discount to net assets means that last year’s total expenses of £2.3m represent 2.2% of Oryx’s market value.

They are 7 directors in total, including Chris Mills, taking out a combined basic fee of £152,500.

Mills, Nigel Cayzer (Chairman), and Rupert Evans have been on the Board since Oryx launched in 1995. The other 4 directors were appointed in 2003, 2005, 2007, and 2011 so fresh blood is in very short supply.

Cayzer was on the board of Caledonia Investments from the late 1980s to early 2000s, when he was thrown out as part of a family feud. Somewhat ironically, Nigel Cayzer was one of those complaining about Caledonia’s persistent discount saying:

“Caledonia stands at a 28pc discount to its underlying asset value which needs to be addressed. There are plenty of ways of skinning this cat but the board seem reluctant to discuss them with me or anyone else.”

Oryx, of course, stands at a similar discount and has often done so.

It’s a little disappointing to see that only 2 directors own shares, although both their holdings are substantial: Chris Mills has £2.6m and John Grace £3.6m.

It’s worth noting that Mills has a much larger stake in NASCIT. He holds over 25% of this trust, worth a chunky £110m, and controls a non-beneficial stake worth nearly £11m. NASCIT’s Chairman, the wonderfully named Peregrine Moncreiffe, owns £12.5m of NASCIT.

Summing up

I feel like I’ve gone down the rabbit hole a bit on this one.

My interest was piqued by a casual observation that the discount had widened a lot this year and wondering why that was. But I ended up looking at two very interesting trusts and the tangled web of Mills’ wider business interests.

As always with these long-tenured managers, I worry how long they’ll stick around. I’ve seen Mills comment that he’ll continue “for as long as it’s fun” but that’s not a great help.

I guess the discount is such that if Mills did decide to take it easy, the portfolio could be unwound over a period of a year or two without causing too much share price damage.

But similar to the likes of Rights & Issues and Independent Investment Trust, the fact its existence is tied to just one individual is a little off-putting.

Oryx has a winding-up vote every two years but this is always carried with ease due to NASCIT’s large stake. The same large stake probably prevents the discount narrowing. The possibility of a share buyback programme is mentioned in the accounts, but the trust would then become even more illiquid.

I’m still none the wiser as to why the discount has increased so much this year, although it may simply be that the narrow discount it traded in late 2018 was just an anomaly.

   

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Disclaimer

Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!

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