Miton UK MicroCap Trust (MINI) was launched in 2015 and invests predominantly in a portfolio of smaller UK companies, typically with a market capitalisation below £150 million.
The managers, Gervais Williams and Martin Turner, argue that the growth potential of smaller companies is less dependent on general economic conditions than larger companies’; their view being that smaller companies often have strong growth potential regardless of whether they operate in a market that is contracting overall. This advantage, they say, potentially unrecognised by some investors, has resulted in the micro-cap sector considerably outperforming the FTSE All-Share Index. Since 1955, when the data was first collected, the FTSE AIM index has outperformed the FTSE All-Share Index by an average of 5% per annum.
Gervais and Martin aim to add alpha within the micro-cap universe, by looking for overlooked stocks with a disproportionate upside if they succeed. This strategy means that there is a diverse portfolio of companies operating in different niches. The approach has a relatively high turnover, with gains continually being reinvested in other potential ‘winners to come’.
Since the trust was established MINI’s most significant outperformance, relative to peers, has occurred in the last year, boosted by a variety of single stock successes: including in the healthcare, technology and climate change arenas. The trust has been the strongest performing one in the AIC UK Smaller Companies sector over the past six months and year, also dramatically outperforming the open-ended sector. This outperformance has not been translated to recognition by the market, however, and the trust trades at around a 13% discount.
We see MINI as an excellent vehicle for investors who are looking to increase their exposure to an uncertain UK recovery, which has potential pitfalls along the way. Due to the size of the companies in the portfolio, and the secular growth stories that many take part in it, the performance of the trust shouldn’t be so reliant on the wider economy; the companies should be be in a better position whether we see a fast and strong rebound or not. In addition we note that the discount has not responded yet to the much improved performance over the past twelve months and, with an annual tender offer provision protecting the discount to the downside, this juncture could prove to be an excellent entry point.
MINI is also a diversifier to the typical UK investors’ equity portfolio, with the AIM sector being significantly different in its composition compared with the FTSE 100 and FTSE 250 indices. There is a much greater exposure to the high growth areas of IT and healthcare, which are doing extremely well in the post-COVID environment – the FTSE All Share for example, has just 1.25% in technology. Furthermore there are considerably more quoted companies in the UK with a market cap less than £150m than above it, including a variety of idiosyncratic opportunities than can’t be found elsewhere. The wide variety of secular growth opportunities offers the potential for long-term returns with the right stock-picking.
|Turnaround in performance over the past year||High OCF|
|Attractive discount relative to peers, despite improved performance||Relatively illiquid underlying holdings|
|Offers diversification to mainstream UK equity funds||Relatively broad spread|