Most market commentators see the Trump-induced tariff chaos as having profoundly negative implications for US capital markets. In a few weeks, investors have witnessed elements of a Brexit-type trade regime re-alignment and a Liz Truss-type financial crisis and now face the prospect of a COVID-type disruption to global shipping routes. These events have shaken up financial markets and heightened short-term uncertainty.
The structural trend equity investors should focus on is the rotation out of the US. It won’t happen quickly or in a straight line, but investors have reason to move their overly weighted capital away from the US.
UBS estimates show that European investors own $ 9 trillion of US equities, about 20% of the S&P 500. This capital has recorded extraordinary gains in the last fifteen years. In recent months, these gains have been dented but remain unrealised. Allocations will now be elsewhere.
This rotation has yet to get started properly. Markets are only just beginning to sense the profound impact it is about to have. With the UK representing less than 4% of the average global portfolio, a tiny slice of the Great Rotation would significantly impact its currency and equity markets. All we need is a catalyst, and the delivery of a bilateral US trade deal may be it.
A few sectors have been looking for a catalyst in the UK market for several years. Smaller companies have been trading at suppressed valuations for this tricky period. Dowgate is home to two well placed funds that will likely benefit from a recalibration of global capital.
Smaller companies have certainly not been for the faint-hearted, with the AIM All-Share Index returning 7.3% over 5 years, -30.9% over 3 years and -6.5% over the last 12 months. These disappointing recent returns highlight the state of this unloved and now under-owned part of the market. However, in this current state of flux, these areas represent a potential opportunity for those resolutely fishing in these waters.
Adam Rackley, the lead manager of the SVS Dowgate Cape Wrath Focus Fund, is a man well versed at staying the duration having swum the Channel, rowed the Atlantic, cycled Lands’ End to John O’Groats and run across the UK. A man of endurance, his ability to be comfortable being uncomfortable has meant that not only is he a small cap survivor, but he has embraced it, returning +109.6% over 5 years, and is now seeing the best upside potential in his portfolio since the fund began in 2016.
His “anti-momentum” strategy looks for stocks having experienced “capitulation events” with a near-term “narrative shift” to drive outsized returns from a portfolio of 20-25 holdings, where the hitting of a strict target price in a shorter period as possible is optimal.
With a unique mindset in more ways than one, this differentiated deep value approach has had many false dawns in recent years but could now be ready to make the most of this weather change in markets.
Onward Opportunities PLC was listed on the AIM market in March 2023 by lead manager Laurence Hulse with the support of Dowgate Wealth. Having earned his stripes at Gresham House among very experienced and successful small-cap managers, Laurence always had ambitions to go it alone, utilising the skills and understanding he had built during his early career.
Onward is an investment trust that invests in specific areas of UK Micro-Cap equities, taking a concentrated portfolio of 20-25 stocks (c75% of AUM in the top 10) with a 3-5 years’ time horizon. Although investing in smaller listed companies, Onward’s approach has many private equity characteristics. It actively agitates for preidentified “catalysts” within its investee companies to drive returns.
The fund has had a great start, returning a NAV return of 19.9% and Share Price Return of 24.0% in its first 2 years, whilst the tricky and somewhat treacherous AIM market is down -12.0% over the same timeframe.
Whilst Onward and Cape Wrath operate in the smaller end of the UK market, sharing a concentrated value approach, they have distinct strategies. There are many cheaply rated UK companies, but avoiding the lure of the many value traps is vital for success.
At Dowgate, we support two approaches to idea generation, each with a separately chosen path to revaluation and realisation. Both funds offer investors unique portfolios built by ‘specialists’ pursuing distinct strategies with proven track records.
The great rotation of global assets away from the US currently being signalled by markets may or may not play out. However, a mean reversion towards UK domestic assets would likely have its most significant price effect at the smaller value end of the market where both Cape Wrath and Onward already operate effectively.
Source: Bloomberg (Performance data as at March 2025). Past performance is not indicative of future results.
Written by
Jackson Wray – Head of Business Development
Jeremy McKeown – Market Strategist
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