TIDMMINI
RNS Number : 6973W
Miton UK MicroCap Trust plc
14 December 2023
14 December 2023
Miton UK MicroCap Trust plc
( the "Company" or the "Trust")
REPORT AND ACCOUNTS FOR THE HALF YEARED 31 OCTOBER 2023
The Directors present the Half Year Report of the Company for
the six months ended 31 October 2023.
The Miton UK MicroCap Trust plc is an investment trust listed on
the London Stock Exchange under the ticker code MINI. The Board,
which consists of four independent directors, appoints the
Investment Manager and oversees all aspects of the Trust.
The Board oversees the Trust's strategy to ensure it has the
potential to deliver an attractive investment return for
shareholders over the longer term. The Trust's portfolio is
distinctive from others in that it principally invests in UK-quoted
microcap companies, which are defined as those with market
capitalisations of less than GBP150m.
The enthusiasm for passive indexation strategies has enhanced
returns at the larger end of the market capitalisation range of
listed companies over recent years. The return of the Numis
All-Share Index since April 2015 is ahead of the return from the
Numis Smaller Companies plus AIM Index excluding Investment
Companies, but the latter currently lags the Numis 1000 Index ex
ICs. This index (which represents the aggregate return of the
smallest 2% of the UK stock market) does not include AIM stocks.
Alternative markets, such as AIM, have been particularly impacted
by negative sentiment towards the UK and smaller companies.
The longer-term pattern since 1955 is the exact opposite, and
once this pattern returns, there is scope for the Trust to deliver
unusually strong returns that greatly outpace all the comparative
indices. However, over the past six months, the Trust's total
return NAV (including dividend income) fell by 15.5% which compares
with a negative total return on the Numis 1000 Index ex ICs of
9.1%.
Results for the Half Year to 31 October 2023
-- Over the half year, the Ordinary share NAV fell from 64.20p
on 30 April 2023 to 54.10p on 31 October 2023, a fall of 15.5%
(including re-invested dividend).*
-- The Ordinary share price moved from 59.90p at the end of
April 2023 to 47.50p at the end of October 2023, a decrease of
20.0% (including re-invested dividend).*
-- A profit of GBP47,000 in the half year to 31 October 2023 has
been credited to revenue reserves.
-- Redemption requests of 18.7% of the Company's issued share
capital were received and accepted, with the redeemed shares
cancelled after the period end on 2 November 2023.
-- The annual redemption mechanism offers investors the chance
to redeem part or all of their holding, addressing any imbalance
between buyers and sellers of the Trust's shares, and helping to
maintain a relatively tight share price discount.
Summary of the results
Half Year to Year ended
31 October 30 April
2023 2023
Total net assets attributable to
equity shareholders (GBP,000) 51,202 60,754
NAV per Ordinary Share* 54.10p 64.20p
Share price (mid) 47.50p 59.90p
Discount to NAV* (12.20)% (7.32)%
Investment income GBP0.3m GBP0.8m
Revenue return per Ordinary Share 0.05p 0.03p
Total return per Ordinary Share* (9.94)p (28.93)p
Ongoing charges(#*) 2.00% 1.72%
----------------------------------- ------------- -----------
Ordinary shares in issue 94,638,561 94,638,561
----------------------------------- ------------- -----------
* Alternative Performance Measure ('APM'). Details are provided
in the Glossary, see Half Year Report.
(#) The ongoing charges are calculated in accordance with AIC
guidelines.
Chairman's Statement
I am starting this review by looking at a number of changes that
have evolved in the UK equity market.
For several reasons, UK equities have been deeply out of favour
with both domestic and international buyers, and especially since
the Brexit vote in June 2016. The valuations prevailing in the US
market have persuaded companies either to move there (for instance
CRH and Wolseley) or to relist there (e.g. ARM Holdings). The UK
currently represents only a 3.5% weighting in world indices
compared to 10% in 2000. This is a precipitous decline, mirrored by
the collapse in the number of UK listed equities overall. There
were some 3,000 listed companies in 1997 as against just 1,213
today, a number that is being steadily eroded by an accelerating
trend of takeovers, barely offset by a feeble number of Initial
Public Offerings. In this calendar year to date, over 30 companies
have already been acquired, mostly by foreign companies, or are in
the final stages of being so. Unless swift government action is
taken, the risk to London's position as the premier global
financial centre is very real.
Domestic institutions, predominately pension funds and insurance
companies, have been dramatically cutting their weightings in UK
equities. They owned more than half the market in the 1990s. Now
they own just 4%, as they have conformed to world index weightings.
Contrarians should find valuations attractive, with UK equities
trading on around 11 times 2023 earnings per share, versus
Continental Europe on 14 times and the US on 20 times. You might
reasonably wonder how relevant this is to the performance of the
Company. In short, the macro trends affecting UK equities have been
felt most acutely at the lowest market capitalisation end of the
market. The SmallCap index has lost around 5% of its constituents
this year thus far, suffering a 20% reduction in its market
capitalisation as a result.
Thanks to the inexorable retreat from UK small cap equities,
hastened by attractive 5%+ yields on short-dated gilts, the market
has been 'offer' only, except in a rare few companies. Nowadays,
market makers hold very little inventory and even sales of small
quantities of stock are sufficient to trigger double digit
percentage falls in prices. The flip side is that when the mood
music changes, the gains in the better companies will be explosive.
The foundations for big gains in the next small cap bull market are
being laid now, for those brave enough to invest in quality stocks
with solid balance sheets in the AIM sector. The Numis Alternative
Markets index peaked on 6 September 2021 and, by the end of October
this year had fallen 46.8% - that is some bear market!
Trust returns since issue in April 2015
Over the six months to 31 October 2023, your Manager struggled
valiantly against the receding tide, making a small amount of
relative headway. The Numis Alternative Markets index ex ICs,
covering AIM listed stocks, was down 16.2%, while the Numis Smaller
Companies Plus AIM Index ex ICs fell 12.2% (quoted in total return
terms including dividend income). The Trust's portfolio includes
relatively few stocks that pay dividends, so its Revenue per Share
amounted to 0.05p over the half year. This is usual for this
portfolio, and similar to the first half last year. It was always
anticipated that nearly all the return of the Trust will be
delivered from microcap stocks generating substantial cash
surpluses as they mature, when their share prices generally
appreciate substantially. During periods of sustained adverse stock
market sentiment, however, microcap share prices can fall to what
appear to be exceptionally low valuations. Over the half year, the
market pattern was adverse, so the Trust's NAV total return fell
15.5%, slightly better than the Numis Alternative Markets index,
but somewhat behind the Numis Smaller Companies Plus AIM Index ex
ICs. The Revenue per Share above is included in this figure.
Since 1955, UK quoted microcaps have substantially outperformed
all other parts of the UK stock market, although this does include
lengthy periods when microcaps have underperformed. Since the Trust
was launched in April 2015, UK microcaps have suffered two periods
of weak sentiment and, therefore, weak returns. The first period
started in July 2018, when Parliamentary gridlock held up
negotiations with the EU about the UK's leaving terms. The adverse
sentiment worsened further in early 2020 with the onset of the
global pandemic. Between July 2018 and March 2020, the Trust's NAV
total return fell by just under 42%. The second period of microcap
weakness has been in place since October 2021, due to the marked
shift towards indexation strategies that has favoured large and
mega cap outperformance. Microcap sentiment has been persistently
weak over this period, and as a result the Trust's NAV total return
has fallen by 48.2% over the last two and a half years.
The predominant trend since 1955 has been of UK microcap
outperformance. When microcaps are in favour, the Miton UK Microcap
Trust strategy has shown that it can deliver very substantial NAV
total returns. Between March 2020 and April 2021, for example, its
NAV total return was over 150%. However, since launch, the two
periods of weak sentiment towards microcaps have meant that the
Trust's NAV total return since April 2015 has only been 13.0%. This
appreciation compares with a rise of 31.7% of the Numis 1000 Index
ex ICs and a flat return from the Numis Alternative Markets Index
ex ICs. The first of these has been enhanced by some of the largest
constituents outperforming the microcap end due to the indexation
trend noted above. We look forward to a return of the long-term
trend of microcap outperformance which has been in place since
1955.
Market valuation of the Trust and share redemptions
Investment trusts are, by some margin, the most suitable vehicle
for investing in quoted microcaps because the returns from
investing in an equivalent OEIC tend to be compromised by the
flip-flop of daily subscriptions and redemptions. The underlying
holdings are generally less liquid and forced selling can depress
their share prices. It mystifies me as to why the regulators allow
illiquid assets, such as commercial property, to be marketed to
investors under the OEIC structure, given the numerous cases of
such funds being suspended during periods of market turmoil and
therefore investors' access to their cash frozen. The mismatch
between ongoing buyers and sellers within an investment trust
strategy, by contrast, is reflected in the trust's share price
relative to its underlying NAV. When there are few buyers for a
sustained period, investment trust share prices can trade 10%, 20%
or even more below their underlying NAVs.
To minimise this risk, the Trust offers all investors a
redemption opportunity once each year. This mechanism addresses the
imbalance between buyers and sellers, with the result that MINI's
share price discount normally remains modest compared with others
in the peer group. The redeemed shares are sometimes placed with an
institutional buyer at NAV. If there are insufficient buyers, then
the redemption shares are either cancelled via portfolio cash or a
similar percentage of the Trust's portfolio is transferred to a
Redemption Pool and sold so that cash can be raised independently
and distributed to the redeeming shareholders.
During this period, we once more offered our shareholders the
option to redeem their shares and I would not be honest if I did
not say that we were disappointed that 18.7% of shareholders
elected to avail themselves of this opportunity. By our
calculations, some 9% of the shares in issue and being redeemed
were held by arbitrageurs. Given the size of this redemption, your
directors decided that it was in the best interests of all
shareholders to place the redeemed shares into a separate
Redemption Pool, to be carefully liquidated over a period of time
after the 2 November Redemption date. We judged that it was in no
one's interest precipitately to dispose of large holdings of
relatively illiquid shares. Based on past experience, we hope to
have completed this exercise by early 2024.
Shareholders may be aware that, from the inception of the Trust
in April 2015, the directors placed a 2% cap on management charges,
so the costs of running the Trust will not rise exponentially if
the share price were to decline much further. Naturally, we hope
that the faint signs of life which we are detecting at the smallest
end of the UK equity market, will strengthen as we move into
2024.
MINI's share price has, on average, traded at 4.6% below its NAV
since launch, a considerably better outcome than nearly all other
trusts in our peer group. We believe that this outcome in part
vindicates the existence of the Trust's redemption facility.
An additional advantage of the redemption facility is that it
makes it easier for large investors to exit in size once a year.
Overall, the Trust has issued almost GBP40 million of additional
capital and returned nearly GBP60 million to redeeming shareholders
since 2015. The recent redemption of c.17.7 million shares on 2
November 2023 is included in the GBP60 million figure.
Board Refreshment and Change of Service Providers
The Board has staggered the retirement of the original directors
so that new directors join the board progressively, enabling
subsequent succession planning to be undertaken in an orderly
fashion. Currently the average term of the board directors is 5
years and 2 months. Louise Bonham, who joined the Board on 15
December 2022, will take over from Peter Dicks as Chair of the
Audit Committee on 1 November 2024. Peter will retire from the
Board on 31 December 2024.
Following a review of service providers, the Board has appointed
subsidiaries of Northern Trust as company secretary, fund
administrator and depositary with effect from 4 March 2024. These
changes will result in a considerable saving for shareholders.
Prospects
Historically, UK quoted microcaps have delivered returns well
above those of UK large caps, even through periods of unsettled
economic conditions. During globalisation, although UK microcaps
did outperform UK large caps, the extent of this was unremarkable,
as companies with rapid growth prospects, such as US technology
stocks, greatly outperformed during these decades. However, when
international relationships fragment, companies generating a stream
of good and growing dividends have an advantage and typically
outperform. At the time of the Trust's launch in April 2015 your
Manager anticipated that global market trends were set to go
through this transition.
Over the last three years, UK stock market sentiment has
remained weak. But even so, as the globalisation trend has faded,
it is noteworthy that UK large caps, typically capital-intensive
businesses paying out a stream of good and growing dividends, have
now started to outperform nearly all other comparators. Whilst UK
large caps have now started to generate premium returns, the usual
pattern of UK microcap outperformance has not been evident over the
last three years.
The key point is that market sentiment can change dramatically,
as it did after March 2020 when UK quoted microcaps, and this Trust
in particular, generated very strong returns. Against this
background, UK microcaps appear overdue for a period of major
performance catch-up. Furthermore, if UK mainstream equities
continue to outperform international peers, and if the usual trend
of UK microcap outperformance of UK large caps continues as it has
since 1955, then the Trust has the prospect of delivering returns
that outpace those of most international strategies. Your Managers,
through extensive research, believe that they can add further
upside to Trust's returns, and that a new market trend such as this
will remain in favour for some decades.
Ashe Windham
Chairman
13 December 2023
Investment Manager's Report
Which fund managers have day-to-day responsibility for the
Trust's portfolio?
Since the launch of the Trust in April 2015, the day-to-day
management of the Trust's portfolio has consistently been carried
out by Gervais Williams and Martin Turner.
Gervais Williams
Gervais joined Miton at March 2011 and is now Head of Equities
in Premier Miton. He has been an equity fund manager since 1985,
including 17 years at Gartmore. He was named Fund Manager of the
Year by What Investment? in 2014. Gervais is also the President of
the Quoted Companies Alliance and a member of the AIM Advisory
Council.
Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a
close working relationship since 2004, with complementary expertise
that led them to back a series of successful companies. Martin
qualified as a Chartered Accountant with Arthur Anderson and had
senior roles and extensive experience at Merrill Lynch and Collins
Stewart.
What were the principal stock detractors and contributors to
portfolio returns over the half year?
Although UK quoted microcap share prices have been weak over the
two years to April 2023, their returns remained weak again over the
half year under review. Specifically, the valuation of government
bonds fell further due to persistent inflationary pressures. Even
quoted companies, paying good and growing dividends, suffered a
degree of share price weakness. In the last two years, investor
sentiment regarding less mature stocks, such as small and
microcaps, continued to be very poor.
The three biggest detractors to the Trust's return over the half
year were Cyanconnode, Totally and MTI Wireless. Cyanconnode is one
of the portfolio's largest holdings. We note that it is already one
of the largest suppliers of smart utility meters to India, at a
time when they are about to install very large numbers of meters.
As yet, the Indian utility companies have not awarded many
contracts, testing the patience of shareholders. We remain upbeat
that substantial contracts will be announced in the coming
quarters.
Totally is a business that administers part of the 111 service
for the NHS and provides other services. With some of its current
contracts concluding, and few out to tender at present,
profitability has dipped. We anticipate an increase in future
contract activity, even if there is a change of government. In the
case of MTI Wireless, this aerial and irrigation control business
continues to generate ongoing growth in profits and dividends, but
as it operates in Israel, its share price was weak in October due
to worries about potential local economic disruption.
Importantly, in each case, the businesses themselves remain well
financed with net cash balances, and in our view their prospects
remain strong. In common with other quoted microcaps they have the
potential for their share prices to appreciate by a multiple of
their current valuation. But, as all three are significant
portfolio weightings, their weak share prices over the half year
have collectively detracted 3.6% from the Trust's returns.
Microcap share prices have been weak for some time. Over the
half year to October the Numis 1000 Index ex ICs was down 9.1%, and
indeed it has fallen by 23.9% over the last two and half years. The
NAV return of the Trust has declined by 15.5% over the last six
months, and 48.2% over the last two and half years. All these
figures are quoted in total return terms, including the
contribution from dividends.
Despite these bleak figures, as outlined elsewhere, we believe
the upside potential for the Trust remains unusually strong. In the
period up to March 2020 for example, the Trust's NAV total return
also fell severely, but thereafter its NAV total return then rose
dramatically, easily exceeding its previous highs. Very few of the
Trust's holdings have generated these kinds of returns at a time
when UK microcap sentiment is so poor. Yu Group is an exception, as
its prospective net cash balances are increasing so fast that they
would have been several multiples of its earlier market
capitalisation if its share price had not also appreciated
significantly.
This is the key to our confidence in the Trust's strategy. The
share prices of UK microcaps such as Yu Group often have an
option-like upside, so when they come right, an individual stock
alone can deliver substantial upside for the Trust. In the
six-month period, Yu Group has enhanced the Trust's return by 3.3%,
almost matching the Trust's three worst detractors. In more
favourable times, there is potential for a number of UK microcaps
to rise by a multiple of their current share prices, and hopefully
relatively few that will suffer severe share price setbacks.
Has the manager maintained or extended the PUT Option protection
that was previously in place?
Towards the end of the period under review, we added to the
trust's existing FTSE100 Put option with a term to December
covering just over half of the portfolio, with an additional
FTSE100 Put that extends to June 2024, as we felt that the cost of
such Puts was very modest at the time of purchase. The combined
effect is that the portfolio has around 95% insurance against stock
market crashes up to mid-December, with just under half of the
portfolio covered thereafter up to mid-June 2024.
The key advantage of investing in a FTSE 100 Put option is that
at times of major market setbacks, the valuation of the Put option
rises, which can then offset a part of the decline of other
portfolio holdings. During the March 2020 setback for example, the
Trust was able to take profits on its FTSE Puts after they had
risen. It then bought more UK microcaps with the additional cash,
at a time when their share prices were low. This process boosted
the returns of the Trust through the market setback and the
subsequent recovery.
In the light of the substantial decline in the Trust's NAV over
the last two and half years, to what degree have the longer-term
prospects of the portfolio holdings deteriorated?
Following the global pandemic, and the contemporaneous financial
stimulus, many of the previous economic bottlenecks have now been
resolved. Unfortunately, these factors have been replaced with new
challenges that are also expected to become ongoing headwinds for
forthcoming corporate profitability. These include:
1. With the rise of inflation, interest rates have been raised
dramatically, and this is expected to suppress economic activity
after a time lag. There have also been a number of geopolitical
events that are expected to weigh on the potential for global
growth, most notably the Russian invasion of Ukraine, and the
Israeli/ Hamas conflict. In addition, there are a growing number of
tariffs being imposed on specific industry subsectors by one
country importing or exporting to another.
2. With the phasing out of Quantitative Easing and the
introduction of Quantitative Tightening, government issuance of
bonds is now a substantial liquidity drain on asset markets.
Additionally, many banks have suffered a drawdown in deposits, so
they have often tightened lending criteria, and in many cases are
reluctant to lend as much as they have in the past.
Whilst there have been some profit warnings to date, the UK
economy has not yet fallen into recession. Even so, elevated
interest rates are expected to bite in time.
The effect is that the advantages of being a well-financed
company are more significant when financial conditions are more
difficult. Specifically, if competitors fail, a well-financed
business can expand into the vacated markets. Well-financed
businesses can also acquire overindebted, but otherwise viable
businesses, debt-free from the receiver, often for a nominal sum.
The upside potential for quoted small caps of these deals tends to
be greater than large caps, as the value-add of an acquisition
typically has a larger impact when the acquirer is smaller.
In conclusion, the prospects for some portfolio companies have
deteriorated, and these have been sold. Meanwhile, whilst a
forthcoming recession might be a challenge for any business, the
advantages for well-financed businesses can sometimes improve,
especially if they are quoted microcaps. Hence, we remain enthused
by the potential trajectory for the share prices of well-funded,
quoted microcaps from here, especially when set in the context of
share prices that at present are often standing at multi-year lows
at present.
The Trust's NAV total return has only been 13% since launch in
April 2015, and geopolitical risks are rising. Surely, these
factors have reduced your confidence in the upside potential for
the strategy?
Since the Trust was first launched in April 2015, UK microcaps
have suffered two periods of weak sentiment that has held back
their longer-term potential.
1. The first extended from July 2019 when Parliamentary gridlock
hindered negotiations with the EU about the UK's leaving terms. UK
microcap sentiment worsened further in early 2020 with the onset of
the global pandemic. Overall, between July 2018 and March 2020, the
Trust's NAV total return fell by just under 42%.
2. The second covers the last two and half years since April
2021, when the allocation crescendo toward indexation strategies
favoured large and mega cap outperformance. Consequently, UK quoted
microcap sentiment has been persistently weak with the Trust's NAV
total return declining by 48.2% between April 2021 and October
2023.
Despite these setbacks, the reason we initiated the launch of
this Trust was because UK quoted microcaps have greatly
outperformed all other parts of the UK stock market since 1955 (the
date when detailed stock market data was first compiled). Whilst
there are periods when microcaps do underperform, these are greatly
outweighed by long periods of microcap outperformance. Over the
past 68 years, the trend has been that the return on a UK quoted
company has been inversely related to its market capitalisation. In
aggregate, the smaller the listed company, the better its
longer-term return.
Given this data, we find it noteworthy that the trend of UK
microcap underperformance ended abruptly in 2020, when Covid-19
struck and the global economy suddenly entered a serious recession.
Large caps are better positioned to dodge the bullets during
recessions because they have such large market positions.
Typically, their prospects are closely related to the fluctuations
of the global economy.
Recessions are challenging, however, and the ongoing
geopolitical risks a worry for all businesses including microcaps.
But, interestingly, these conditions are an advantage for
well-funded businesses that are immature and small. First, being
small, they have a greater chance of replacing any sales lost to a
recession by taking market share elsewhere. Second, when a
competitor fails, or a microcap makes an acquisition from the
receiver, the upside potential tends to be much greater than for a
large cap. With a small market capitalisation, the scale of the
potential added upside is often much more meaningful for the
combined businesses. Given these factors, we were not surprised
that the Miton UK Microcap Trust's NAV total return rose more than
150% between March 2020 and April 2021, despite the challenges of
the pandemic and the global recession.
Clearly, we are disappointed that the Trust's total return NAV
has only been 13% since launch in April 2015. Unfortunately, this
period includes the two periods of weak microcap sentiment as
explained above. The Trust's return has lagged a rise of 31.7% in
the Numis 1000 Index ex ICs, although it is ahead of the flat
return from the Numis Alternative Markets Index ex ICs since issue.
To a degree some of the largest index constituents may have
outperformed due to the impact of the indexation allocation trend
noted above.
Total returns from launch to 31 October 2023
Numis All-Share Index 40.4
Numis 1000 Index ex ICs 31.7
-----
Numis Smaller Companies Plus AIM Index ex ICs 25.2
-----
MINI NAV 13.0
-----
We do highlight, however, that the 'nifty fifty' large cap
stocks also conspicuously outperformed in the 1960s and early
1970s, a stock market pattern that is reminiscent of the present.
Thereafter, as the trajectory of the global economy weakened due to
the oil price crisis and geopolitical risks, UK microcaps went on
to outperform large caps substantially for many decades.
In short, despite the recent adverse sentiment haunting UK
quoted microcaps, we believe that the potential for the Trust's
strategy has not diminished. Indeed, we note that numerous UK
quoted microcaps are currently standing on what appear to be low
valuations that are completely unjustifiable, so their upside
potential may be even greater than normal this time round.
Will the lesser liquidity of the UK quoted microcap investment
universe remain a bar to institutional capital in future?
During the globalisation decades, most investors have gradually
become accustomed to investing more internationally, and typically
in strategies with elevated risks and greater upside potential.
1. In stock market terms, this might have included US 'unicorns'
(high growth stocks that have typically drawn down very substantial
capital sums to build a market position that they hope eventually
becomes very valuable).
2. In bond market terms, it has typically involved investing in
long-dated bonds so that as bond yields fell, they had greater
upside potential.
3. In borrowing terms, it has also included double or triple
geared index ETFs or private equity funds with geared upside
potential combined with the advantage of paying ever lower interest
costs.
As a result over the past several decades, most investors have
reduced their UK equity weightings and scaled up their capital
participation in strategies with extra risk and upside.
In this context, we find it interesting that, with the problems
of inflation and the decline in bond valuations, the FTSE100 Index
has now moved to become amongst the best performing of all global
stock markets over the last three years. This is remarkable, as
most local investors have continued the trend of selling the UK to
invest elsewhere, yet this has not stopped the UK stock market
outperforming.
As it is, the Trust's investment universe includes more than
half of all UK quoted companies. For now, most professionally
managed UK small cap strategies seldom research the potential of
microcaps. However, if UK microcaps do outperform midcaps from
here, then most small cap fund managers will need to become more
accustomed to investing in UK quoted microcaps, or else suffer
underperformance. Importantly, as there is lesser liquidity within
microcaps, a portfolio shift like this will be self-reinforcing,
potentially boosting microcap upside to an even greater degree.
Furthermore, if the global economy is weak in future, and if
quoted microcaps do outperform as significantly as they have in the
past, then we anticipate that even institutional investors will
become accustomed to allocating capital further down the UK market
capitalisation range - even into UK microcaps. These institutions
often already hold unquoted companies in their portfolios, so the
liquidity of quoted microcaps in this context will be a
considerable improvement.
What are the prospects for the Trust?
In the answers above, we have attempted to outline why we
believe that the prospects for the Trust's strategy appear
unusually strong at present. In this section, we have sought to
cover why we believe the prospects for the Trust are so compelling
on a medium-and longer-term basis.
Historically, UK quoted microcaps have delivered returns well
above that of UK large caps, even during periods of unsettled
economic conditions. During globalisation, UK microcaps continued
to outperform UK large caps, but the outcome was of little interest
to institutional investors, as international strategies investing
in large caps with rapid growth prospects, such as US technology
stocks, performed strongly.
But when economic conditions are more unsettled, companies
generating a stream of good and growing dividends have the
advantage and typically outperform. At the time of the Trust's
launch in April 2015 the Manager anticipated that global market
trends were set to go through this transition.
As the globalisation trend has faded over the last three years,
it is noteworthy that UK large caps, which typically comprise
capital intensive businesses paying out a stream of good and
growing dividends, have now started to outperform nearly all
international comparatives. If UK large caps are now set to deliver
returns ahead of most other comparatives, to what degree should we
be worried that the usual pattern of UK microcap outperformance has
been absent over the last three years?
In our view, this is explainable. As yet, local investors have
not changed their behaviour of prioritising capital allocation to
overseas strategies rather than to the UK. The reason that UK large
caps have outperformed over the last three years is related to the
behaviour of international investors who have started to increase
their weightings in low-beta equity income stocks, such as those
within the UK's mainstream stock market index.
The key point here is that market sentiment can change
dramatically, and when a favourable new trend is established, it
can remain in place for a very long period. If UK mainstream
equities do continue to outperform international comparatives, as
we anticipate, and if the usual trend of UK microcap outperformance
of UK large caps also returns, then the Trust has the potential to
deliver returns that will outpace those of most international
strategies.
This would represent a sea change in stock market trends, and in
our view will justify local investors ceasing to allocate capital
overseas and bringing it back to the UK, where the government is
looking to help the stock market in various ways. And as local
investors, they would not just allocate to UK large caps.
We therefore feel that UK quoted microcaps are at the start of a
supercycle that has the potential to persist for decades. In short,
Martin and I believe the prospects for the Trust's strategy are the
best they have been for thirty years.
Gervais Williams and Martin Turner
13 December 2023
Portfolio Information as at 31 October 2023
Rank Company Sector and Main Valuation % of Net Yield*
Activity GBP'000 Assets %
1 Yu Group Utilities 3,686 7.2 0.6
2 MTI Wireless Edge Telecommunications 1,254 2.4 7.5
3 TruFin Financials 1,231 2.4 -
4 Accrol Group Consumer Staples 1,169 2.3 -
5 DX Group Industrials 1,021 2.0 3.5
6 Cyanconnode Holdings Telecommunications 978 1.9 -
7 Pantheon Resources Energy 965 1.9 -
8 Zinc Media Group Consumer Discretionary 953 1.9 -
9 Shield Therapeutics Health Care 941 1.8 -
10 Frontier IP Group Industrials 913 1.8 -
----- ------------------------ ----------------------- ---------- --------- -------
Top 10 Investments 13,111 25.6
------------------------------- ----------------------- ---------- --------- -------
11 Andrada Mining Basic Materials 857 1.7 -
12 Journeo Industrials 824 1.6 -
13 Ingenta Technology 813 1.6 2.7
14 Braemar Industrials 806 1.6 5.2
15 Supreme Consumer Staples 804 1.6 2.9
16 STM Group Financials 737 1.4 1.2
17 Van Elle Holdings Industrials 695 1.4 3.2
18 Savannah Resources Basic Materials 685 1.3 -
19 Serabi Gold Basic Materials 678 1.3 -
20 Zephyr Energy Energy 665 1.3 -
----- ------------------------ ----------------------- ---------- --------- -------
Top 20 Investments 20,675 40.4
------------------------------- ----------------------- ---------- --------- -------
21 Enteq Technologies Energy 664 1.3 -
22 REACT Group Industrials 617 1.2 -
23 Ultimate Products Consumer Discretionary 617 1.2 6.0
Elemental Altus
24 Royalties Basic Materials 617 1.2 -
25 Avacta Group Health Care 611 1.2 -
26 Marwyn Value Investors Financials 604 1.2 11.8
27 Concurrent Technologies Technology 588 1.2 -
CT Automotive
28 Group Consumer Discretionary 579 1.1 -
29 Tirupati Graphite Basic Materials 572 1.1 -
30 Kistos Energy 570 1.1 -
----- ------------------------ ----------------------- ---------- ---------
Top 30 Investments 26,714 52.2
------------------------------- ----------------------- ---------- ---------
Balance held in 92 equity investments 18,198 35.5
-------------------------------------------------------- ---------- ---------
Total equity investments 44,912 87.7
------------------------------- ----------------------- ---------- ---------
Listed Put Option
UKX - December 2023 16 -
5,700 Put
UKX - June 2024 5,900 Put 185 0.4
Total Put Options 201 0.4
------------------------------- ----------------------- ---------- --------- -------
Other net current assets 6,089 11.9
Net assets 51,202 100.0
------------------------------- ----------------------- ---------- ---------
* Source: Refinitiv. Based on historical yields and therefore
not representative of future yields. Includes special dividends
where known.
FURTHER INFORMATION
Miton UK MicroCap Trust plc's report and accounts for the half
year ended 31 October 2023 will be available
today on https://www.mitonukmicrocaptrust.com/documents/ .
It will also be submitted shortly in full unedited text to the
Financial Conduct Authority's National Storage Mechanism and will
be available for inspection at
data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure
Guidance and Transparency Rules.
Enquiries:
Miton UK MicroCap Trust plc
Gervais Williams, Martin Turner, Claire Long Tel: 020 3714
1500
Peel Hunt LLP (Broker)
Liz Yong, Luke Simpson, Huw Jeremy Tel: 020 7418
8900
ISIN: GB00BWFGQ085
LEI: 21380048Q8UABVMAG916
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END
IR FLFERFTLVLIV
(END) Dow Jones Newswires
December 14, 2023 02:00 ET (07:00 GMT)
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