Tough year for Montanaro UK Smaller Companies as growth style left behind – Montanaro UK Smaller Companies (MTU) has released its annual results for the year ended 31 March 2021, during which its total share price was up by 50% and its NAV 35.8%. Unfortunately this fell short of its Numis Smaller Companies (ex investment companies) benchmark return of 65.6% for the year, though the company did enjoy a narrowing of its discount. Chairman, Arthur Copple, attributed this performance to a sharp rotation into value and low quality companies whereas MTU invests in high quality, growth companies.
However, there was strong performance from a number of holdings including Treatt, Kainos and XP Power, which rose by 140%, 127% and 80% respectively. Manager, Charles Montanaro, said the company has made it through such periods during its long-term history (the trust celebrates its 30th anniversary this year) and so the team is “more convinced than ever that investing in high quality, small growth companies with experienced management teams will deliver excellent returns over any medium term period”.
Statement from the chairman:
Performance
The Financial Year saw one of the sharpest rotations into Value and Low Quality on record. MUSCIT invests in high quality, growth companies that, as expected, fared less well in such an environment. The sharp underperformance registered during the year follows a year of strong performance during which MUSCIT outperformed by more than 17%. As a result, there is merit in looking at the past two Financial Years together. On that basis, MUSCIT has outperformed by c.2% on a NAV basis and by c.27% in share price terms.
Since inception in 1995, the Company has delivered a cumulative Net Asset Value (“NAV”) total return of 980%, which compares to a return of 560% for the Benchmark.
Manager
The Board is delighted to confirm that Charles Montanaro has agreed to continue managing the Company for a minimum of 5 more years. Since returning as named manager in 2016, Charles has managed to outperform the benchmark by 8% in terms of NAV and by 55% in share price terms despite the recent Value rally. He is also a major shareholder in MUSCIT which, when combined with the holding of Montanaro Asset Management, means that it is his largest personal listed investment.
Dividends
The Company’s investment objective is to generate capital growth and this remains unchanged despite the amended dividend policy introduced in July 2018. Dividends are paid each quarter equivalent to 1% of the Company’s NAV on the last business day of the preceding financial quarter, being the end of March, June, September and December
During the Financial Year, the Company paid four quarterly dividends amounting to a total of 5.52p, equivalent to 5.5% of the share price at the start of the year. MUSCIT remains the highest yielding UK SmallCap investment trust in the market.
Discount
Over the last financial year, the discount of MUSCIT’s share price to NAV, as shown in the graph on page 3 of the full Annual Report and Accounts, narrowed from 11% to 2%. For the first time in more than 20 years, MUSCIT’s shares briefly traded at a premium to NAV. The Board and the Manager have worked hard to make MUSCIT more attractive to private clients, including a five for one share split, an attractive dividend policy, and reducing costs. These initiatives appear to be bearing fruit.
Continuation Vote
Under the Articles of the Company, the Directors will propose a resolution at this year’s Annual General Meeting to remove the obligation that they put a resolution to shareholders at the Annual General Meeting in 2022 to wind up the Company.
If passed, this will allow the Company to continue as an investment trust for a further five years.
In light of the strong long-term track record of MUSCIT and the commitment of Charles Montanaro to stay at the helm for at least 5 more years, the Board unanimously recommends that all Shareholders vote in favour of Resolution 12 at the Annual General Meeting, as they intend to do themselves.
Outlook
News of the Pfizer vaccine in November 2020 brought much-needed hope to the world. However, it also unleashed the most dramatic style rotation in equity markets in living memory. Value and Low Quality bounced back strongly at the expense of Growth and High Quality. The speed with which this rotation has unfolded is unprecedented.
Given MUSCIT’s “Quality Growth” style and overweight in technology, the underperformance since last November is unsurprising. Indeed, it shows that the Manager has stuck to its knitting and has not deviated from its investment style. The Manager invests in profitable, well managed companies in growth markets and avoids highly cyclical areas such as high street retail, restaurants, hotels, airlines, oil & gas, materials, and metals & mining which helped performance going into COVID. These lower quality Value companies suffered when the pandemic first broke out but have bounced back sharply in recent months.
These style rotations are typical of the recovery period that comes immediately after a Bear Market – think of March 2003, March 2009 and 2012/13. The Board is confident that the Manager will remain committed to the “Quality Growth” style that it has implemented so successfully since 1995. It believes that, in spite of the current uncertainties, shareholders can look forward to the future of MUSCIT with confidence and optimism.
MTU : Tough year for Montanaro UK Smaller Companies as growth style left behind