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Fund Profile

River & Mercantile UK Micro Cap 27 February 2024

Disclaimer

Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
RMMC’s concentrated, growth portfolio could be a major beneficiary of a UK recovery…
Overview

River and Mercantile UK Micro Cap (RMMC) owns a concentrated portfolio of companies at the smallest end of the market-cap spectrum. Manager George Ensor targets early-stage growth businesses below £100m in size. He selects only around 40 holdings at one time, which he backs with conviction. Stocks will be allowed to grow above £100m if the investment case still holds, though profits are often taken on the way up to recycle into new ideas. George has a preference for tech-enabled firms that can generate high returns on capital, leading to notable allocations to the technology and healthcare sectors (see Portfolio).

The trust has an unusual return profile, with a capital-redemption mechanism designed to distribute capital to shareholders should assets grow considerably above £100m. This has been exercised five times in the trust’s history, returning a total of £77m, and keeps the trust’s asset base at a level where George can still invest in the index’s smallest companies.

The manager’s growth bias and a focus on the smallest companies in the index means the trust tends to amplify market moves. Due to the headwinds faced by the market in the past couple of years, driven by high inflation and rising interest rates, long-term cumulative performance has struggled. However, the manager argues that valuations are at severely depressed levels and a turnround in the earnings outlook could lead to a strong recovery (see Performance).

The trust currently trades at a wide Discount of 15.8%. Whilst this is in line with the five-year average, the trust traded at NAV as recently as May 2021 when the investment style was in favour and the redemption mechanism was last exercised.

Analyst's View

We believe RMMC makes the most of its investment-trust structure by using a fixed pool of capital to exploit the liquidity premium at the smallest end of the market-cap spectrum to contribute to long-term performance. The trust has a redemption mechanism to ensure assets stay at a level where George can invest in micro-caps, which we believe can also contribute to the total return of the trust over the long term.

It is important to note that this approach arguably puts an effective capacity constraint on the trust and, when combined with quite a narrow shareholder base, has contributed to a wide bid/offer spread. As such, we believe the trust may be more suited as a long-term holding for retail investors or smaller professional investors, rather than looked at as a trading opportunity.

That being said, the recent weakness seen in UK smaller companies has pushed valuations to levels rarely seen outside of market crises, though these have historically been followed by strong market rebounds. RMMC’s micro-cap focus and growth bias means the trust typically magnifies market moves and as such, if there were to be a market recovery, we believe RMMC would have a good chance of significantly outperforming.

This opportunity is arguably amplified by the current Discount the shares trade on. Whilst only in line with the five-year average, the discount has previously narrowed sharply, especially when the prospect of a capital redemption increases. As such, the current level could be seen as a very attractive entry point, should the long-awaited UK smaller companies recovery materialise, potentially leading to a double-whammy recovery.

Bull

  • Strong total return since inception including five capital distributions
  • Micro-cap, growth-focussed portfolio that typically amplifies market upcycles
  • Wide current discount could make for a compelling entry point

Bear

  • Growth-focussed portfolio exposed to higher inflation and interest rates
  • Performance fee may be off-putting for some investors
  • Limited discount control, with no buy backs utilised since launch
Continue to Portfolio

Fund History

10 Apr 2024 Micro-managing
What opportunities exist in the smallest part of the UK market?
27 Feb 2024 Fund Analysis
RMMC’s concentrated, growth portfolio could be a major beneficiary of a UK recovery…
05 Jan 2022 Kepler’s top-rated trusts for 2022
We unveil the winners of our ratings for 2022 in the Growth, Income & Growth and Alternative Income categories…
09 Sep 2019 Fund Analysis
Negative sentiment toward the UK and a change of manager have left this trust on a discount of 20%...
24 May 2019 Fund Analysis
A highly concentrated trust with a strong track record since inception in 2014...
20 Mar 2018 Star struck
Star culture presents siginficant problems for asset management companies when top managers jump ship. We examine the steps some groups take to avoid them...
09 Mar 2018 Keep calm and carry on...
We examine the reaction of investment trust discounts amid recent market volatility...
25 Oct 2017 Patience is a virtue…
We analyse the outperformance of UK small-caps and why it has been so important to take a long-term view...
13 Sep 2017 Big Issue(rs)
We highlight the UK equity trusts that have issued and bought back the most shares over the course of 2017 so far and how these actions have affected shareholders...
12 Jun 2017 MAYDAY!
As the Conservative party founders, we examine the impact of last week’s disastrous election on trusts...
07 Jun 2017 Omnishambles...
Given the huge levels of political-induced uncertainty, we analyse recent drivers and themes within the UK equity market ahead of the upcoming election
25 May 2017 An opportunity in UK small-caps?
We round up recent recommendations, results and analysis of the latest developments in the UK small-cap sector...
04 May 2017 Size matters
We highlight the potential liquidity and capacity constraints that could hinder open-ended UK smaller companies funds...
04 May 2017 Fund Analysis
A top-performing UK small-cap trust, run by an experienced manager that is designed to limit potential capacity or liquidity related constraints...
View all

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