River & Mercantile UK Micro Cap (RMMC) aims to achieve long-term capital growth from investment in a diversified portfolio of UK micro-cap companies, typically comprising those with a market cap of less than £100 million at the time of purchase.
The company launched in December 2014, with George Ensor having taken over as manager from Philip Rodrigs in 2018. George looks to utilise an active, bottom-up strategy looking to add real value in the micro-cap end of the market via in-depth analysis where coverage is sparse. Like all managers at River & Mercantile, George follows the group’s PVT (Potential, Valuation, Timing) investment approach (see portfolio section).
As of the end of June 2019 the portfolio is relatively concentrated, with only 43 holdings, but diversified by size and sector. Only financials have a weighting greater than 20%, and even the largest sector overweights, oil & gas and health care are relatively low at +6.5% and +5.4% respectively.
Performance has been varied since George took over the portfolio in a difficult period for UK small cap managers. Initially, performance was strong and for much of 2018 the trust outperformed the benchmark and peers alike. However the trust saw its returns hit hard in Q4, ruining what might have otherwise been a strong start for the new manager. Since then, to 28 August 2019, the trust has returned 6.6% marginally underperforming the benchmark (6.9%) and trailing the AIC peer group (9.5%).
As with most UK focused trusts, the past few years have seen the discount widen dramatically – although in this case, exacerbated by the change in manager in early 2018. Over the past two years the trust has reached a premium of close to 17%, and a discount of over 20%. Currently the trust is trading at a discount of around 20%, considerably wider than the sector average of 9.2%.
There are plenty of things to like about River & Mercantile UK Micro Cap. Firstly, the manager isn’t afraid to have conviction behind his approach, illustrated by the low number of holdings in the portfolio and the fact George often invests in companies that could be considered out of favour. Nevertheless, the portfolio is well diversified across industries and this is reflected in the low beta of the portfolio and low volatility in comparison to peers.
George has come to the helm of the portfolio during a tricky time for managers, especially those within the UK small cap space. The trust was hit particularly hard in Q4 due to style exposure and some stock selection issues. Since then, returns have improved; although still lagging the peers. However, this might have been over exaggerated in the discount and having gone from trading on a very hefty premium only a year and a half ago, the trust is now trading a discount of close to 20%, offering a clear opportunity for investors. Should we see some of the pessimism surrounding the UK subside, the discount could well narrow.
|Strong performance since inception
||New manager has yet to outperform the benchmark and peers
|Extremely wide discount relative to peers and history||Pessimism continues to surround the UK
|Specialist mandate that suits the investment trust structure||Relatively expensive OCF|