Odyssean Investment Trust: Small Cap, Big Ambitions

OIT doesn’t just buy shares and wait for the market to do the work. They take meaningful stakes in companies and actively engage with management to improve performance. This could involve sharpening strategy, improving cost control, or pushing for better capital allocation.

The focus is on quality businesses that are underperforming their potential. By helping drive operational improvements, OIT aims to increase profits and ultimately the value of the company. As these changes come through, the market starts to recognise the improvement, leading to a re-rating in the share price.

This approach gives OIT more control over outcomes than a typical fund. Returns are not just dependent on market movements, but on real, tangible changes inside the businesses they own.

UK smaller companies are currently out of favour, meaning many are trading at low valuations. Yet many of these businesses generate the majority of their revenues overseas, making them far less dependent on the UK economy than investors might assume.

OIT’s portfolio reflects this clearly, with less than 20% of revenues coming from the UK, meaning the vast majority of earnings are generated internationally. This creates a disconnect, globally exposed businesses are being priced as if they are purely UK-focused.

If sentiment towards UK equities improves, or investors simply recognise the global nature of these businesses, there is clear potential for a meaningful valuation re-rating.

A key part of the investment case is the embedded value within the portfolio, and the ability to realise it through corporate action. Many of OIT’s holdings are trading below what a strategic buyer or private equity firm may be willing to pay, particularly as operational improvements come through and the underlying quality of the businesses becomes clearer.

Recent and ongoing developments highlight this clearly, including NCC’s Escode disposal, Spire’s strategic review, and Blackline’s takeover. These are not theoretical examples, they demonstrate that parts of the portfolio are already “in play,” with value being crystallised. Since 2019, takeover offers across the portfolio have delivered an average day-one bid premium of c.47%, highlighting consistent and meaningful value uplift for shareholders upon acquisition.

This shows that OIT’s approach is not reliant on a broad market re-rating to deliver returns. Instead, value can be realised directly through transactions, often at a premium to current share prices, which acts as an key driver of returns.

Importantly, as OIT runs a concentrated portfolio, these events can be highly material when they occur. A single successful transaction can have a meaningful impact on NAV, accelerating returns and bringing forward value that might otherwise take time to be recognised by the market.

• Return of capital from NCC: Proceeds from the Escode disposal are expected to be returned to shareholders, alongside potential completion of the strategic review of the cyber division.

• Spire strategic review outcome: Ongoing review of strategic options, including a potential sale of the business, could crystallise value at a premium to current valuation.

• Operational improvements: Transformation programmes across several holdings should begin to show up in margins and earnings.

• Rising M&A activity: Undervalued UK assets are increasingly attractive to strategic and private equity buyers, creating potential for takeovers.

• Re-rating of UK small caps: As sentiment improves, capital returning to the asset class could drive valuation multiples higher.

• Sustained earnings growth: Operational leverage and self-help initiatives across the portfolio have the potential to deliver multi-year profit growth.

OIT typically holds a relatively small number of investments, with the top positions accounting for a large portion of the portfolio. This high-conviction approach means each holding can have a meaningful impact on overall returns.

While this increases upside when ideas work, it also raises stock-specific risk. If one or two key investments underperform, it can have a noticeable impact on the trust’s NAV. This makes outcomes more dependent on individual company performance than in more diversified funds.

The focus on smaller companies introduces higher volatility and lower liquidity compared to large-cap investing. Share prices can move more sharply, particularly during periods of market stress or weaker sentiment.

In addition, trading volumes in smaller companies can be limited. This can make it harder to build or exit positions quickly without affecting the share price, especially in more challenging market conditions.

UK smaller companies have been out of favour for a prolonged period, and there is no guarantee that this will change quickly. Even if individual companies improve operationally, the broader market may continue to undervalue UK-listed equities.

This means that while underlying business performance may strengthen, share prices may take time to reflect that progress. A sustained lack of investor interest in the UK market could delay or limit the re-rating potential across the portfolio.