Miton UK Micro Cap publishes stellar results as pandemic offered greater potential for holdings – Miton UK Micro Cap (MINI) has revealed its full year results for the year to 30 April 2021, which saw its share price total return (including dividends reinvested) up by 141.5% and its NAV up from 51.33p to 104.83p, representing a total NAV return including dividends reinvested of 104.4%. This compares with FTSE SmallCap Index (ex ICs) which was up 69.5%, and the FTSE AIM All Share Index, which returned 59.8% over the same period.
Meanwhile the trust’s discount narrowed significantly over the year from 15.55% to 0.3%.
MINI offers investors the opportunity to redeem their shareholding each year, and so accordingly, redemption requests in relation to 2,671,198 ordinary shares, or 2.4% of share capital, at 30 April 2021, were received for the 30 June 2021 Redemption Point.
Extract from the manager’s report:
The year to April 2021 was a period when numerous share prices around the world recovered from the pandemic setback, and often moved to new highs. The total return on the FTSE SmallCap Index (excluding investment companies) index was 69.5% and the FTSE AIM All Share Index was 59.8%.
While economic conditions were challenging for some companies during the global pandemic, for others the nature of change offered them much greater potential than before. In the case of Avacta for example, they found their affimer technology which may significantly reduce the side effects of chemotherapy in time, was also potentially very suited to use in lateral flow tests for Covid. Synairgen found that their treatments that helped asthmatics combat the cold virus, turned out to be very helpful to lessen the disease for those with shortness of breath due to Covid.
The abrupt reduction in demand during the pandemic-induced recession, followed by an equally abrupt renewed surge of demand with the economic stimulus, has led to shortage of certain materials, such as copper, leading to a very strong share price appreciation of Jubilee Metals in the year. The appreciation of asset prices was particularly evident amongst cryptocurrencies, and this led to a very substantial rise in the share price of Argo Blockchain.
One of the features of quoted microcaps, is that they start with modest market capitalisations. The potential upside from the changes in their markets can drive up their share prices by multiples of the price at purchase. The four stocks above, contributed over 27% of the Trust’s total returns of 104.4% during the year to April.
Clearly there were some holdings that detracted from the Trust’s return during the year. The most disappointing was Kromek Group, a company which is improving the images of medical scanners, and also identifies radioactive substances for the security forces. In the case of Kromek, they were unable to deliver a major order due to the pandemic travel restrictions, so the potential cash payback has been deferred. The Trust has largely exited from the holding, although it still detracted 0.9% in the year. There were not many other significant detractors, although collectively 7 Digital, Tekmar Group, Microsaic Systems and TP Group detracted 1.0% from the Trust’s return in the year.
What impact would a sustained pick up in global inflation have on the Trust?
Following the surge of economic stimulus during the global pandemic, it is evident that there are all sorts of industry constrictions that are now leading to renewed inflationary pressures. At this stage, it is unknown whether these bottlenecks will prove to be temporary or long-term in nature.
If inflation does prove to be more embedded, then the yields of long-dated bonds will probably rise, which could weigh on the valuations of all asset prices, including stock markets. At the margin, a rise in long-dated bonds might make it harder for some companies with major debt burdens, or those that operate at a loss over many years, to access borrowings when their current facilities expire. Most of the stocks in the Trust’s portfolio would be largely unaffected, as they tend to have strong balance sheets with little debt and are not expected to be persistently loss making.
If inflation does become entrenched, then at the time of an economic downturn it might reduce the scope for central banks or governments to inject economic stimulus in future. Such a change might put more companies at risk of insolvency. One of the advantages of being listed, is that companies can raise external capital and acquire previously overborrowed, but otherwise viable businesses from the receiver. These kinds of acquisitions often bring in additional skilled staff and generate attractive returns on investment, greatly enhancing the prospect of generating plentiful cash in the future. Sometimes these transactions can be potentially transformative for quoted microcaps, because they can be substantial relative to their diminutive size.
Overall, whilst a sustained increase in inflation would, to some degree, make it harder for nearly all businesses, generally we believe that quoted microcaps have some offsetting factors that could greatly enhance their prospects.
What are the prospects for the Trust?
The valuation of government debt around the world has risen considerably, in a trend that has persisted for decades. The valuation of the full range of assets has also increased, with the valuations of numerous technology companies and unicorn stocks probably rising the most. Since the US has so many quoted businesses with rapid growth expectations like these, the valuation of the US stock market as a whole has risen more than others, and it has delivered outstanding returns over recent decades.
The UK stock market mainly comprises companies that tend to grow less rapidly. Hence, the valuation of the UK stock market has not risen as much as the US. Furthermore, the uncertainties of the Brexit over the last five years has also suppressed investor enthusiasm, and so the valuation of all sorts of UK quoted microcaps are still undemanding, even after the recent period of performance catch-up.
Following the global pandemic, the whipsaw in global demand has led to shortages of supply in a wide range of individual products. This has initiated a period of inflation, and the valuation of government debt has peaked out somewhat. The recent reversal in bond valuations tends to favour profitable companies that generate surplus cash, as they have greater resilience than technology companies that often need plentiful capital to fund their growth. The recent period has also favoured younger businesses, as many of these operate in immature sectors, where prospects are less reliant on ongoing global growth. The Trust’s portfolio includes numerous younger businesses that are anticipated to generate substantial surplus cash, and hence the recent economic and market trends have been reflected in a period of substantial outperformance. Specifically, it is reassuring to note just how well the Miton UK Microcap Trust’s strategy can perform at a time of disappointing global growth and rising inflationary pressures.
Inflationary pressures may fluctuate over the coming quarters, and the stock exchanges themselves might oscillate as the market trend of recent decades runs out. In time, we expect the forthcoming market trends to resemble those of the decades prior to globalisation, when UK quoted microcaps substantially outperformed. The Miton UK Microcap Trust’s strategy was set up in anticipation of this potential. If the economic and market patterns are fundamentally changing, then the Trust’s strategy is well-set to deliver a long period of premium returns.
MINI : Miton UK Micro Cap publishes stellar results as pandemic offered greater potential for holdings