North Atlantic Smaller Companies shows you can profit from ‘boring’ businesses
Thursday 05 May 2022 Author: Daniel Coatsworth

Despite having generated more than three times the return of the FTSE All-Share index over the past 10 years (304% versus 100% respectively), North Atlantic Smaller Companies Investment Trust (NAS) remains under the radar of most investors.

Those already owning the shares are rarely willing sellers, says manager Christopher Mills. ‘A lot of our shareholders have been with us forever. We started with less than £5 million and the trust’s assets are now worth more than £740 million.’ Launched in 1973, the trust has been run by Mills since 1982.

Mills has historically shied away from publicity, preferring to focus on the job in hand rather than regularly market the trust. A reversal of fortune for the share price since November 2021 appears to have prompted a change in strategy, with the manager and founder of Harwood Capital now eager to get the word out.

Given that Mills personally has £145 million invested in North Atlantic Smaller Companies based on his 27.57% stake, it’s easy to see why he is taking the time to explain what the trust does and how it’s been a success on a longer-term basis.

Shares in the trust have fallen by 23% since November 2021 for two reasons. First, small caps in general have suffered as inflationary pressures increased and concerns have grown over a potentially weaker economic outlook.

Second, investors have become worried about the prospects for several companies in North Atlantic Smaller Companies’ portfolio in the belief that Covid-related benefits will not be repeated. For example, shares in portfolio holding EKF Diagnostics (EKF:AIM) have more than halved in value over the past six months. The fact EKF continues to have exposure to Russia has also weighed on its share price.

‘People have forgotten there is a real business in EKF,’ says Mills. ‘We’ll do £16 million of EBITDA (earnings before interest, tax, depreciation and amortisation) this year and we expect to grow EBITDA – with no revenue from Covid – to £25 million within three years. It’s crazy. Diagnostics businesses don’t trade on six times EBITDA, they trade on 12 to 15-times.’


Mills talks about the companies in his portfolio as if he was an owner rather than simply an investor, hence the use of the pronoun ‘we’ rather than ‘they’ or ‘it’. His passion about the companies in the portfolio reflects the investment trust’s approach.

‘You should think of us as an industrial holding company. We buy good businesses, invest in them and grow them. We don’t put a lot of debt in our deals, so we have to buy them cheap to make it work. We then get a multiple uplift (the business is valued on a higher multiple of earnings) when we get it to a certain size,’ explains the fund manager.

The portfolio contains three different types of investments. First, there are direct equity investments which are principally small cap companies on the UK stock market. Current holdings include asset manager Polar Capital (POLR:AIM) and housebuilder MJ Gleeson (GLE).

Second, it has stakes in investment trusts Oryx International (OIG) and Odyssean (OIT), both of which are managed by Mills’ Harwood Capital group.

Finally, North Atlantic Smaller Companies is the way for retail investors to get exposure to Harwood Capital’s private equity investments as the portfolio invests in three of its private equity funds.

While the trust’s investment strategy is to look at companies on both sides of the Atlantic, the US investments currently in the portfolio are concentrated on unquoted companies rather than listed ones.


Last September, Mills wrote in the trust’s half-year results that it was becoming harder to find quoted equities which are ‘fundamentally undervalued’. General stock market weakness so far in 2022 may now present some new opportunities for the trust.

Given it is sitting on a large sum of cash, according to the fund manager, there is certainly the ability to make new investments. That cash pile might grow even further thanks to expectations for selling various investments over the coming year, either because of takeovers or companies having delivered gains where it is worth the investor taking profits.

The downside of market weakness is that good news coming out of some existing investments has yet to translate into a significantly higher share price. This includes tenpin bowling operator Ten Entertainment (TEG) which is only up 1.4% year-to-date despite reporting like-for-like sales growth ahead of pre-Covid levels and expectations to deliver a record year of profitability in 2022 and a result ahead of market forecasts at the time of the announcement on 29 March.

Shares in many consumer-facing companies are being depressed by market concerns about a slowdown in spending on discretionary items like clothing and leisure activities.

Mills was behind the team which changed the management on Ten Entertainment when it was previously called Essenden, then built up the company and took it private. ‘We then built it up some more, took it public again and as the business was flying, we started to sell down. Covid hit and caused disruption but it’s now unbelievably good. The stock is ludicrously cheap on five times EBITDA.’


To the outside investor, North Atlantic Smaller Companies may seem to have a few challenges ahead, yet its investment style is akin to a car workshop and patience can yield rewards as illustrated by its superior long-term performance record.

It finds corporate vehicles which need fixing or fine tuning. During the maintenance stage there might be misfires or parts that need replacing but once things are running smoothly, the ‘vehicle’ or business can then accelerate, and this uplift is the end goal.

The investment trust recently hit the big time after helping to fix waste expert Augean which subsequently received a takeover offer.

Current investee company Hargreaves Services (HSP:AIM) also seems to have found a higher gear after suffering a few flat tyres over the years. Its share price is up 45% year to date.

Sometimes it can take years to complete the repair work and that could be the case with Frenkel Topping (FEN:AIM) where Mills is helping to drive a grand plan to turn the independent financial adviser into a full-service business for personal injury and clinical negligence claims. The company is 18 months into a growth plan that could take another four or five years to complete, he comments.

Ultimately someone buying shares in North Atlantic Smaller Companies should not expect it to invest in high growth tech firms or ‘story stocks’ where their products or services are the latest craze.

‘I’m a very conservative investor,’ says Mills. ‘We do really boring deals. We simply buy things at a discount to what we think is the real value of the business.’

Once an investment is made, Mills and his team are very hands-on, often taking a seat on the board of directors of investee companies so as to help drive strategic change.

Given the trust has a track record of making good money including more than 10 times its investment with Augean over a four-year period, you know Mills and his team are clever people. On this basis, it appears that patience with an array of less glamourous companies can pay off over time.


Current unquoted investments in the trust’s portfolio include WaterBox which sells water in paperboard cartons, tapping into demand from large corporations who want to stop using plastic bottles. While there is nothing revolutionary about its packaging, Mills says the real excitement lies in what’s written on the side of the box.

‘WaterBox is really a media company,’ he explains. ‘Its clients include Ferrari, Nike, Calvin Klein, airlines and hotel companies and they want their branding splashed on the side of the box. It’s virtue signalling on a monumental scale.

‘Anyone can produce a similar box but WaterBox stands apart from the crowd because it can do very short production runs. It did $10 million EBITDA on $18 million of sales last year and has no debt.’ There is talk of WaterBox considering a listing on the London Stock Exchange.

Another unquoted investment is 3BL Media which is a digital marketing software subscription business helping large corporations to communicate their ESG initiatives to stakeholders. Clients include Alibaba (BABA:NYSE), Mondelez (MDLZ:NASDAQ) and Procter & Gamble (PG:NYSE).

‘We bought 3BL for six times EBITDA and the business is growing at 25% a year,’ says Mills. It secured the deal at a bargain price for an interesting reason. ‘The man who owned it decided to go into politics in California. He was then found guilty of bribing people and is now serving seven years in prison.

‘The management team said, “We can’t be owned by a convicted criminal given we are in the ESG business”, so they forced him to sell and that’s how we got it.’

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