Miton UK MicroCap 06 April 2023

In our view, Miton UK MicroCap (LON:MINI) provides a genuine diversification opportunity for investors. As discussed in Portfolio, the focus is on UK small- and micro-cap equities including a significant allocation to AIM listed stocks that makes up 80% of the allocation. MINI is managed by Gervais Williams and Martin Turner who argue that micro caps – stocks with market capitalisations of less than £150m – offer investors a contrasting exposure to mainstream stocks. They are typically less mature, with more nimble management structures which may explain why they have substantially outperformed since 1955, when UK data was first comprehensively collected. Furthermore, they believe there is an abundance of opportunities in the sector to diversify stock-specific risk and add additional value given the near absence of professional investors analysing this investment universe.

As discussed in Performance, whilst UK-listed global majors have performed unusually well relatively to international peers over the last 18 months, domestic concerns have weighed heavily on UK-quoted micro-cap share prices. Gervais argues this is similar to the period prior to March 2020 when uncertainties of the Brexit negotiations and the global pandemic weighed on MINI’s aggregate performance. We note MINI has at times demonstrated exceptional performance and surprised on the upside, generating a NAV total return of 277% between March 2020 and May 2021. Gervais argues that less mature, quoted micro caps can sometimes sustain commercial momentum even during a global economic recession.

MINI’s shares tend to trade close to its NAV when compared to its peer group and offers all shareholders’ a voluntary redemption facility each year. Its current Discount is 8.9%, and its five-year average is 6.9%.

Gervais and Martin have demonstrated an ability to deliver exciting returns when micro-cap conditions are favorable, outperforming most other trusts within the peer group. Given the unsettled market conditions currently, we are reassured that the managers place a special emphasis on premium customer service and relatively strong balance sheets since these factors have the potential to offset profit margin pressure, and insolvency risk. Furthermore, if a number of zombie companies and highly borrowed private companies become insolvent in the coming months, we believe this may boost market dispersion. This may provide an opportunity for companies with strong balance sheets and access to institutional capital to expand into the vacated markets and may include opportunities to acquire debt-free businesses for low entry valuations.

In the long run, we believe the concentration of holdings at the smaller end of the market-cap spectrum means MINI will naturally provide a less correlated returns profile that could complement a portfolio skewed to large caps. Over the last 18 months dispersion has narrowed considerably, which has impacted nearly all active strategies. However, this adverse factor appears to have been especially unhelpful for UK small caps, and most particularly micro caps including MINI.