Miton UK MicroCap

MINI is the strongest performing UK Smaller companies trust in 2020…

Add to watchlist Request a meeting Download View key data

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Miton UK MicroCap. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Miton UK MicroCap

Summary

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.

Kepler View

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.

bull bear
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

Portfolio

Miton MicroCap Trust (MINI) is a specialist vehicle which offers exposure to the AIM market, that accounts for around 2% of the overall quoted UK market. Gervais and Martin focus on companies that are valued below £150m, but they have invested in companies as small as £2m. In recognition of the high risks of investing in the smallest companies, the number of holdings in the portfolio is high at 110.

Gervais and Martin launched the trust in 2015, having identified there were tensions in the process of globalisation which could lead to long-term opportunities for micro caps. In their analysis, the effects of globalisation and the removal of barriers across borders have led to an era of low inflation and low rates. The reduced cost of imports – due to globalisation – have offset inflationary pressures, and interest rates in the developed world have therefore been kept lower. This development, along with easy access to credit, have led to misallocation of capital in global stock markets – in their view. In fact they say globalisation has concealed a wide range of issues, including the incredibly weak progress in productivity since the financial crisis. This situation has negatively impacted wage growth across the world and elevated political tensions, raising the question of the sustainability of the political and economic status quo. Gervais and Martin believed that it would lead to a backlash, which would favour more nationalist politics and smaller companies.

Following the launch of the trust, the thesis received support from the 2016 Brexit referendum and the election of Donald Trump later that year. However for the managers this support has not yet translated into the sustained tailwind for small caps that they anticipated. Over the last two years, in particular, the UK political logjam has held back the usual premium returns on micro caps. However the micro-cap tailwinds have showed renewed vigour in the final months of 2019 and in 2020 during the pandemic, as we discuss in the Performance section.

Typically the managers look for companies with a market capitalisation below £150 million. These holdings can be in companies as small as £2 million: which would normally be a liquidity issue for an open-ended fund, but is possible for an investment trust. Gervais notes that there are many more quoted companies in the UK with a market cap less than £150m than above it, and they typically sit in a range broader range of industries than the mainstream stock industries. This tendency means that, due to the size of the trust and the focus on low valuations (described below), when the company has success in an investment the upside can be unusually large. Examples can be seen in the Performance section.

Before making an investment decision, the team looks at five key areas:

Turnover growth - The team look for companies that increase their revenue regardless of economic conditions. They recognise that this as a key attribute for sustainable long-term growth. Typically these will be companies that are improving their current product lines, or innovating new ones.

Sustained margins - The managers look for companies that are trying to improve productivity in order to reduce the cost of goods, all while justifying an improved market price. They also look for companies that improve/sustain profit margins through offering exceptional customer service.

Management of risk - Typically the managers believe that those companies which generate attractive returns, aren’t always the ones that grow the fastest. Instead the managers look for companies that are growing at a more measured pace, and therefore do so with less downside risk.

Better balance sheets - The portfolio will usually be comprised of companies with net cash balances, or those with modest debt. The managers have observed that companies which are under-geared are often able to remain profitable during times of economic setback.

Low entry valuations - The managers prefer stocks where the price reflects previous problems, rather than those where the price is based on future expectations.

The result is a well-diversified portfolio of around 110 companies, of which the top ten make up 32% of the portfolio (31/08/2020). Turnover can be reasonably high, as Gervais and Martin’s approach is to recycle profits into more attractive opportunities when their calls come good and outsized returns have been achieved.

top ten holdings

company
% of nav
Kape Technologies
5.1
Avacta Group
4.8
Cerillion
3.6
Frontier IP Group
3.4
SIMEC Atlantis Energy
3.3
Caledonia Mining Corporation
3.2
Corero Network Security
3.0
Jubilee Metals Group
3.0
MTI Wireless Edge
2.7
Venture Life Group
2.6

Source: Miton UK MicroCap as at 31/08/2020

Another attractive feature of the trust is that it offers diversification not only to the peer group, having one of the lowest correlations to the Numis Smaller Companies Index in the UK Smaller Companies sector, but also in terms of industry diversification compared to the FTSE 100.

sector exposure compared to ftse 100

Source: Morningstar

Alongside the equities in the portfolio, the trust has previously also held a put option on the FTSE 100. This approach has been extremely beneficial for the trust, as we discuss in the Performance section, which sold the option near the bottom of the market in March 2020. The managers tell us that, although they may consider purchasing another protective out in the future, it is unlikely that another will be purchased in the near future; given the cost drag of rolling the position and the fact they think they bought the option at a particularly attractive entry point.

Gearing

The managers have the ability to gear up to 15% of the NAV. Although they do not anticipate gearing becoming a permanent feature of the trust, it will be used opportunistically in the future. Nonetheless they are yet to use this facility since launch and, as at the end of August 2020. the trust had net cash of c. 7% of NAV.

Returns

Launched in 2015, Miton UK MicroCap was designed to to profit from a reaction against the era of globalisation. Initially the performance of the trust was strong. However Q4 of 2018 saw a setback in UK small caps, as ongoing political deadlock and Brexit uncertainties led many asset allocators to steer clear of the UK. MINI has gone back to its winning ways, however, and the trust has been the standout performer in the UK Smaller Companies sector in recent times.

Over the past year the trust has NAV total returns of 34.1%, eclipsing the IA and AIC smaller companies sectors – which have returned 4.3% and 1.3% respectively. This outcome is the strongest return of any trust in the sector and has been achieved at a standard deviation of 33.8%. The managers believe that this result illustrates the long-term potential in the micro-cap space, and the benefits of micro-cap companies in uncertain environments. The unique blend of companies which sits within the universe, in particular, has been supportive of returns: as has been demonstrated by the broad mix of companies contributing the strongest returns to the portfolio over the past year. The top two contributors, Synairgen and Avacta, both sit in the med-tech space, and are therefore benefitting from their previous research and its potential uses to fight COVID-19. However the third best contributor, SIMEC Atlantis, is finding ways to deliver energy via low carbon installations. While the fourth best contributor, Jubilee Metals, reprocesses metals out of tailings from old mines. Collectively this combination means that the performance isn’t reliant on the growth or good fortunes of a specific industry or sector.

Alongside the strong performance from the underlying companies in the portfolio, the trust’s FTSE 100 Put option also aided the strong performance. The option was sold in March of 2020 for £2.7m, generating a profit of £1.8m on an original purchase price of just under £1m. This money was then used to fund additional investments, at a time when many valuations were standing at unusually low metrics.

one-year performance

Source: Morningstar

Over the longer term the performance has also been strong, despite difficult market conditions. After launching in 2015 the trust has had a number of headwinds, namely surrounding the political uncertainty and the impact of Brexit. The final quarter of 2018 particularly impacted the trust, weighing down returns which would otherwise have outperformed the benchmark and peers. Over five years the trust has had NAV total returns of 25.5%, which is marginally behind the AIC peer group return of 30.1%. The IA sector has a return of 41.0%. The standard deviation during this period has remained low at 14.1%, as has the downside capture ratio of close to 0.45.

five-year performance

Source: Morningstar

Dividend

Initially the dividends for the trust were particularly strong, with two of the portfolio holdings yielding over 10% at the time of purchase. After two years these companies were taken over, and since then the dividend income from the portfolio has been at a lower level.

However, due to the type of companies that the managers look to invest in, dividends are not a priority and MINI yields just 0.2%. Nonetheless the managers holdings that go on to start paying dividends are often sold, and this means that the managers often refer to the trust as an early stage income fund.

In FY20 a full year dividend of 0.10p was declared. This figure compares to a dividend of 0.20p the prior year.

Management

Gervais Williams and Martin Turner run the portfolio. They both have decades of experience in the UK small-cap sector. Gervais joined Miton in March 2011 and is senior executive director of the company. After starting as a portfolio manager in 1985, the majority of his career has been spent as head of UK smaller companies at Gartmore. Martin Turner also joined Miton in 2011 and has had a long-term working relationship with Gervais. Martin has widespread experience in the investment world as head of small/mid-cap equities, at companies including Rothschild, Merrill Lynch and Collins Stewart.

Both Gervais and Martin are part of a tight-knit team of six UK-focused managers at Miton: an asset management firm that has genuinely active management at the core of their business. The company runs multi-asset and equity funds, as well as investment trusts. Collectively they manage close to £9.1bn, as at March 2020. Last year it was announced that Miton would be merging with Premier Asset Management in an all-share merger deal, which saw shareholders receive around 0.3 shares in Premier for each Miton share – valuing them at around 56.7p, a 38% premium. The combined business has helped them to offer a greater range of products at a greater scale, along with benefitting from economies of scale and a diversified revenue mix.

Discount

As we discuss in the Performance section, returns have dramatically improved in 2020. However the discount has remained wide relative to historical and peer group averages.

Currently the trust is trading at a discount of 13.8%, in comparison to a peer group weighted average of 11.0%. The one year average discount for the trust is 10.0%. As can be seen in the five year graph below, the trust’s discount has been persistent over the past couple of years, principally due to the uncertainty surrounding Brexit and its impact on microcaps. With greater reliance on the UK economy, smaller companies are often seen as more vulnerable than the bigger more global stocks. However this trend may not always be the case, as shown during the COVID-19 period. Gervais and Martin believe that small-cap stocks’ flexibility and access to external capital puts them in a better position to thrive, regardless of the economic conditions.

discount

Source: Morningstar

The trust does have a discount control mechanism, allowing investors an annual tender. The most recent tender, in June 2020, resulted in investors redeeming nearly 20% of the trust.

Charges

An important feature of the trust is that the management fee is based on share price, rather than asset value. This feature aligns the managers interest with investors, in that it incentivises them to see the share price trade at NAV rather than on a discount. The relatively small size of the trust, with a number of fixed costs, does mean that the OCF of 1.68% (as of the most recent factsheet in August) is higher than the sector average of 0.82%. However in September the management fee was reduced from 1% to 0.9%, and this move should reduce the OCF going forward.

The KID RIY for the trust sits at 1.63% in comparison to a sector wide average of 1.39%. It is worth noting, however, that calculation methodologies can vary.

ESG

Environmental Social and Governance (ESG) factors are considered throughout the process at Miton, alongside financial factors. A wide variety of sources of information regarding ESG are used, including company reporting, meetings with management and boards as well as external ESG research. However, given the team invest in micro-cap companies, the ESG policies and disclosures can be less robust. This tendency sometimes leads to lower ESG scores in holdings. Gervais notes, however, that this trend does not necessarily reflect higher ESG risk or poor ESG risk management, compared to larger companies in the same industry.

A particular area of ESG that the managers focus on is governance. They believe that an experienced chairperson and suitably composed board of directors is critical in a company’s long-term financial performance. In addition management expertise and appropriately aligned remuneration are important in implementing the company’s strategy and managing risks.

Last year saw Miton hire their first head of responsible investing, supporting their growth and expertise in the ESG area.

Fund History

Disclaimer

This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.

The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.  

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.



Welcome to Kepler Trust Intelligence

Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority.
Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority. To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase. We do not share your personal information and your answers are not linked to your identity for marketing purposes.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.