Miton UK MicroCap 15 September 2022

Miton UK Microcap (MINI) has been managed by veteran UK Small Cap equities manager Gervais Williams, alongside Martin Turner, since the trust was launched in 2015. The trust invests in a portfolio of UK equities with a clear focus on micro-cap companies, typically AIM-listed stocks with a market capitalization of below £150 million.

As discussed in Portfolio, the managers believe that we are entering an inflection point where the economic trends, which have led to the rise of globalisation and the dominant position of large caps over multiple decades, are in reversal. They expect this to provide opportunities for UK micro-caps as domestic markets benefit from the reshoring of businesses and supply chain inflationary pressures. Gervais and Martin focus on identifying relatively undervalued companies that demonstrate the ability to generate surplus cash flow through their operations leading to near-term capital growth. The portfolio is well-diversified across sectors and businesses to minimise the impact of the stock-specific risks that are prevalent within the micro-cap sector.

As discussed in Performance, MINI has outperformed the broader UK equity market and its comparator indices since its inception on 01/05/2015 to 07/09/2022. Strong returns were made relative to the peer group and benchmark in the aftermath of the coronavirus pandemic, through the success of the underlying strategy and the highly profitable gains from a FTSE 100 put option. However, over the short-term, MINI has underperformed, leading the trust to trade at a significant Discount of 8.0%, as at 07/09/2022. This is wider than the trust’s five-year average of 6.5%. The board offers an annual redemption facility which limits the potential impact of the discount by providing shareholders with the opportunity to exit their position at, or close to, NAV.

In our view, MINI has much to offer the long-term investor. Gervais and Martin’s contrarian economic views lead, inevitably, to a Portfolio that will offer diversification to many investor portfolios, and a returns’ profile less correlated with the growth strategies that have performed well in recent years. However, as discussed in Performance, the conviction the managers have in the reversal of multi-decade-long trends which includes a prolonged low interest rate environment and the expansion of cheap credit, may lead to periods of underperformance if this thesis takes longer than expected to materialise. This is reflected in returns over the past 12 months.

The inherent volatility associated with the micro-cap sector makes the trust particularly sensitive to liquidity conditions in the market. However, the managers focus on selecting companies with low levels of debt and high levels of imminent cash generation, which along with the limited use of Gearing, may dampen the risk associated with the asset class during a period of prevailing market uncertainty. Additionally, whilst the re-introduction of the FTSE 100 Put option hasn’t paid off yet as it did during the pandemic setback, for us the differential in returns between large caps and micro caps underlines the scale of the trust’s recovery potential. The current Discount may provide a good entry opportunity, especially when considering the annual redemption facility which provides investors with the potential for limited discount volatility.