Miton UK MicroCap 14 October 2020
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 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 demand for the trust's shares, however, and the trust trades at around a 13% discount.
Although it is clear that a UK recovery - even after the current crisis is resolved - may take some time, and there are plenty of potential pitfalls along the way, MICRO offers an interesting play on UK companies. Due to the size of the companies in the portfolio, and the secular growth stories that many take part in it, the managers' view is that their performance shouldn’t be so reliant on general direction of the wider economy - operating in localised 'niche' trading environments instead.
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.
|Turnaround in performance over the past year
|Wide discount relative to peers, despite improved performance
|Relatively illiquid underlying holdings
|Offers diversification to mainstream UK equity funds
|Relatively broad spread