Nicholas Todd
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Updated 11 Jul 2023
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Disclaimer

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 (MINI) has released its financial results for the year ending 30/04/2023. Over the year, the trust has seen its NAV decline by 29.3% on a total return basis, which compares to a total return of -11.2% for the Numis 1000 Index and the average return of -7.7% for the AIC UK Smaller Companies sector. MINI’s share price declined by 31.8% on a total return basis.
  • UK micro caps were out of favour in a tough year for most markets, and having started the period cheap became even cheaper.
  • The trust’s discount widened from 5.0% to 7.3%, over the financial year. However, in the subsequent period it has again narrowed to 5.2%. The redemption mechanism helps the trust to trade at a narrower discount than the peer group’s simple average which is currently 14.6%.
  • MINI offers an annual redemption facility, which is designed to ensure that the share price does not deviate too far from the underlying NAV. At the 30/06/2022 redemption point, 14,614,999 ordinary shares were requested to be redeemed or 13.38% of the issued share capital at that date. The Redemption Point will change to 2 November in 2023, to align with the interim report.
  • Total net assets have fallen from £99.5million to £60.8million over the financial year which has led to an increase in the ongoing charges figure increasing from 1.41% to 1.72%.
  • Chairman Ashe Windham commented “…your directors believe that Miton UK MicroCap Trust has the potential to have bursts of strong returns.” He added, “When quoted microcaps start at what we consider to be extraordinarily low valuations, combined with such modest institutional allocations, favorable trends can be sustained over the coming decade or two.”

Kepler View

The most recent financial year has proven challenging for Miton UK MicroCap (MINI). The ongoing volatility in financial markets fueled by the uncertain path of inflation and interest rates have had a disproportionate effect on small and micro-cap stocks in particular. However, we believe MINI offers investors a genuine diversification opportunity through its concentration of holdings at the smaller end of the market cap spectrum, which has proven that in the right environment can generate significant outperformance. For example, MINI’s largest holding, Yu Group, which is a utility that supplies energy to corporates, was the biggest contributor to returns over the year with a share price appreciation of 176%, contributing 2.5% to overall NAV performance and highlighting how microcaps can deliver strong returns.

It is hard to escape the inherent volatility associated with small and microcap investing particularly during uncertain times. According to the managers, the reactions from investors from near misses or even when stocks exceeded the forecast has either been overdone on the downside or muted on the upside. For example, the share prices of HeiQ, Aferian and Saietta all fell between 70-75% despite all three companies appearing to retain the fundamental strengths MINI’s portfolio managers, Gervais and Martin look for: strong balance sheets, attractive corporate prospects, and the potential to generate significant cash surpluses – factors that can enhance a company’s ability to absorb the impact of margin pressures that come with higher inflation and higher interest rates. Last year’s largest detractor, Accrol, the UK’s leading tissue converter, was retained in the portfolio and was one of the top contributors to the trust’s return this year adding 0.46% with a share price gain of c. 45%.

In addition, Gervais and Martin believe this period of uncertainty may provide a longer-term opportunity for the trust. They believe that the multi-decade globalisation period that preceded the coronavirus pandemic, which saw underperformance and significant outflows from UK equities by institutional investors, has come to an end. They anticipate the recent strong performance of large-cap UK equities will entice UK institutional capital to return. Furthermore, Gervais argues the underperformance of the small and microcaps has opened up a number of opportunities at unusually low valuations which appear to have disproportionate upside potential, that during uncertain times can also enhance the diversification across the portfolio’s holdings. For example, the largest new portfolio holding was Shield Therapeutics, a lowly valued FDA-approved iron supplement pill business with rapidly growing sales and cash flow surpluses.

Finally, the board continues to offer shareholders access to the annual redemption facility which should provide reassurance to investors by providing some downside protection to the value of their investment by ensuring they will be able to buy and sell relatively close to par, which in our view enhances the risk/reward characteristics of the strategy. With the trust currently trading at a discount of 5.2%, this may prove an attractive entry opportunity – particularly given MINI’s ability to generate exceptional returns if the economic environment permits, as demonstrated by the NAV total return of 277% generated between March 2020 and May 2021.

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