Results analysis: Miton UK MicroCap

• Miton UK MicroCap (MINI) has released its interim financial results for the half year ending 31/10/2023. Over the period, the trust saw its NAV decrease by 15.5% on a total return basis. The trust has no formal benchmark, but the closest comparator is the Numis Smaller Companies 1000 ex Investment Companies Index, which fell by 9.1% in total return terms in the same period. The AIC UK Smaller Companies peer group average fell by 6.1%.
• Performance has been affected by negative sentiment towards the UK, particularly companies at the lower end of the market cap spectrum, in which MINI specialises. This has led to a particularly challenging period, though the managers argue that micro-cap companies typically outperform over the long term and the outlook for the portfolio is unusually strong.
• MINI offers a voluntary annual redemption facility, which is designed to ensure that the share price does not deviate too far from the underlying NAV. The date of this was moved to 2 November in 2023 to align with the interim reporting period, having previously been held in June. At the most recent redemption point, holders of 17.7m ordinary shares or 18.7% of the issued share capital requested to redeem their holdings.
• The discount widened from 7.3% to 12.2% over the period. This takes the discount to approximately in line with the average of the peer group though significantly wider than the average the trust has traded at since inception of 4.6%.
• The trust holds a FTSE 100 put option to mid-December providing cover for over half of the portfolio in the event of a sharp market fall. An additional put covering the period to June 2024 has recently been added.
• Chairman Ashe Windham acknowledged the headwinds in the smaller companies space saying, “UK equities have been deeply out of favour with both domestic and international buyers… [but] … When the mood music changes, the gains in the better companies will be explosive.”

Kepler View

Miton UK MicroCap (MINI) aims to provide investors with exposure to the exponential growth opportunity available in the smallest listed UK equities. It has been managed by Gervais Williams and Martin Turner since the trust’s inception in April 2015. The trust has been facing headwinds for the past couple of years as negative sentiment towards the UK from both domestic and international investors, particularly towards companies at the lower end of the market cap spectrum, has increased.

However, the managers have described the outlook for their strategy as unusually strong. They highlight that while micro caps typically outperform over the long-term, more recently there has been a period of acute weakness that has affected returns. Despite this, they believe the portfolio has the potential to bounce back, just as it did in the Covid recovery period, having returned over 150% in the period from March 2020 to April 2021. They believe that micro caps are uniquely placed to do so due to their option-like upside meaning that when they do recover, they do so quickly and sharply. This has been demonstrated by the holding in Yu Group which performed well in the period, adding 3.3% to the trust’s NAV. We note that the market conditions that have caused the most recent pullback, namely the increase in interest rates to tackle higher inflation, are arguably easing and as such, we believe there is scope for significant upside potential in the portfolio should sentiment improve.

The managers continue to hold cash in order to take advantage of valuation opportunities in the market. We understand this would have been beneficial to performance in the period under review. The level as at 31/10/2023 was 11.9% which we believe offers the managers considerable flexibility to take advantage of mispricing in the market.

The discount widened from 7.3% to 12.2% in the period covered by the interim report. This level is notably wider than MINI’s five-year average of c. 7% and in line with the sector average. The trust has a redemption facility in place with the aim of minimising the discount, which has historically led to the trust trading closer to NAV than its peers. We believe the wider discount is especially attractive given the redemption mechanism, which reduces the risk of the discount widening further. The current discount is attractive, in our opinion, when it is combined with the potential for a sharp bounce back in the portfolio, should the managers’ belief of considerable upside optionality prove accurate.