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Annual results from Miton UK MicroCap reflect another tough year for quoted microcaps

MINI fails to keep up with AIM index

Miton UK MicroCap (MINI), the tech and healthcare-focused (around half of the portfolio) UK smaller companies-sector company, has reported annual results for the year ended 30 April 2020. Over the year, total NAV returns fell by (8.2%), while the shares were down by (20.%). 

MINI noted that, over the same period, the FTSE SmallCap index (excluding investment trusts) Index fell (20.7%) in total return terms including dividend income, and the FTSE AIM all-share index fell by (15.2%), both much in line with the FTSE all share index that fell (16.6%).

MINI’s revenue return at £81,000, was 0.06p per share, which compares with £307,000 for last year, 0.20p per share. A number of holdings that paid high dividends were either sold or taken over prior to the year under review, and the proceeds reinvested into stocks that had been more overlooked with greater potential, in anticipation that they would deliver better returns over time.  In the final two months of the financial year, a number of investee companies also opted to cancel or defer dividend due to uncertainties relating to Covid-19.

Another difficult year for UK quoted microcaps

Chairman, Andy Pomfret, had this to say, in his review of the year: As in the previous year, many investors held back from investing in UK quoted microcaps due to the imminent Brexit vote. Although this pattern changed with the clear UK election result, this was later overshadowed by a stock market setback when the UK, in common with many other countries implemented a policy of “lockdown” to reduce the loss of life from the global pandemic. 

During the five-year period since launch on 28 April 2015, the UK voted to leave the EU in 2016, after that many investors scaled back their allocations to UK quoted companies. Effectively, there has been something of a one-off Brexit headwind over recent years that has offset the long-term microcap tailwind.  The outcome is that the Trust’s total return over the five years since issue has been modest at 6.0%. This return compares to that of the FTSE SmallCap Index (excluding Investment Trusts) that was down 1.0%, the FTSE AIM All Share Index that was up 15.2% and the FTSE All Share Index that was up 4.8%.”

‘Advantages of many quoted microcaps in the current climate include strong balance sheets, lack of defined benefit pension schemes, and attractive valuations’

“The decade up to 2019 was defined by extra borrowing. The surge of low-cost imports kept inflation and interest rates low. Alongside, when

global growth wobbled, central banks reached for more and more Quantitative Easing so that their banks kept lending. Whilst global growth may have been patchy over this period, there was a form of economic equilibrium because whenever corporate debts became due, there was always someone prepared to relend to them. Stock markets appreciated as well, because even these quoted companies that were not generating cashflow could afford to boost their dividends using extra debt that was cheap and plentiful. Heavily cash consumptive growth stocks also performed particularly well during this period, as there was easy access to plentiful risk capital.

With the pandemic, an abrupt and deep global recession has now destabilised the previous equilibrium. Most businesses have either suffered an alarming drop in demand, or supply, or both.  Whilst the government has stepped in to bridge the huge shortage of corporate cashflow for now, this is only a temporary fix. With the major setback in profitability, numerous corporates now find themselves exceptionally short of cash. So, for at least the coming year, the ongoing pressure on corporate profitability and cashflow will continue to cause many companies to radically restructure or even fail.

This is a big moment for investors, because the past decades of plentiful cash and risk capital have abruptly dried up. It isn’t just that dividends are being passed. We should anticipate that quite a few companies will need emergency access to extra cash, either through dilutive rights issues, or the sale of a part or all of their businesses at distressed valuations.

In contrast, many quoted microcaps enter this period of corporate challenge with three major advantages:

(i) numerous quoted microcaps already have strong balance sheets as they have learnt that they could not rely on external investors to fund their growth ambitions;

(ii) almost no quoted microcaps have defined benefit pension schemes, and hence they won’t have to fund extra pension fund contributions; and

(iii) many UK microcaps with attractive prospects are currently standing on unusually low valuations.

The conditions are now right for UK quoted microcaps not only to enjoy a period of performance catch-up, but also for the prior trend of sixty years of outperformance to resume. The Miton UK MicroCap Trust’s strategy is particularly well suited to these market conditions.

Overall, an investment in this Trust is not about hoping that the UK economy outperforms others, but rather about accessing the potential from a much wider and more diverse investment universe than the quoted majors. It is about buying into overlooked companies that have been putting in years of spadework out of the limelight, but that will now be in a position to deliver a cash payback.  As they gain recognition, the appreciation of their share prices could be all the more distinctive at a time when the earnings of most mainstream stocks are under pressure.”


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