Miton UK MicroCap 07 April 2021

Miton UK MicroCap (MINI) aims to provide shareholders with capital growth over the long-term. Managed by Gervais Williams and Martin Turner, MINI typically focusses on investment in companies with market capitalisations of less than £150m, usually listed on the AIM market.

As discussed under portfolio, MINI was launched in 2015 with a view to positioning an investment vehicle for the longer-term cycle that the managers perceived to be in the offing at the time. There is a deep underlying theme running through the structure of the trust, emphasising a reversal of many of the economic trends of the past three decades. Ultimately the managers expect this to result in reshoring of businesses, rising wage inflation and a change in market leadership.

They note that the UK market offers a hugely attractive subset of micro-cap companies which stand to benefit from precisely such a scenario. Operationally, many of these companies have, and will likely retain, relatively endogenous drivers of growth. Yet, as noted under portfolio, Gervais and Martin believe these companies are often ignored and that there is a large opportunity set in financially robust companies.

As discussed under performance, MINI is by a significant margin the strongest performing trust in its sector over the 12 months to 15/03/2021. Yet the managers believe we are only in the foothills in a substantial market rotation that should provide them with further tailwinds going forward.

Despite the exceptional performance, MINI remains on a discount of c. 8.6% (as at 15/03/2021). The board offers a redemption facility annually, which allows shareholders the opportunity to exit at or close to NAV.

MINI is a portfolio constructed with a specific outlook (discussed under portfolio) and designed to reflect the optimal manner in which to invest should that outlook materialise. We have significant sympathy for this big picture outlook, though the enormous consequences of breaking out of a 30-odd-year cycle and the heuristic bias of the market is likely to mean that relative returns will encounter some near-term volatility as investors waver over the durability of the new direction.

Yet we agree MINI’s process, built to capture these opportunities over the long-term whilst managing short-term risks, is well-suited to the task. The massive outperformance already enjoyed by MINI investors in recent months is, we would say, a validation of the argument that even small rebalancing of portfolios into this area can cause outsized returns due to the illiquid nature of the market. And yet, MINI’s portfolio remains on a discount to the wider market.

Despite the focus on ensuring there is a margin of safety at the individual stock level, we think shareholders should be prepared for volatility; as we discuss under discount. The volatility that can arise in times of market stress from the illiquidity of the underlying portfolio is often matched by volatility in MINI’s discount. However, we think the redemption facility should serve to anchor the discount over the long-term.