Miton UK Microcap Trust (MINI) announced its annual results for the year ended 30 April 2023. Miton struggled throughout the year in what remains a challenging environment for small and micro caps. NAV fell 30% and shares 31%. In contrast, the Numis 1000 Index was down 11.2% during the same period. Despite the performance, the discount remains reasonably tight, closing at just 7%.
During the analysts’ call, management noted the challenges in the sector including flows out of UK markets over the past few years, highlighting the exposure of pension funds and insurance companies in particular. Since 2000, the share of the UK stock market owned by UK pensions and insurance companies has fallen from 39% to just 4%. Chairman Ashe Windham added that against these headwinds it is unsurprising that many UK equities continue to languish on low valuations. In the manager’s view, the outperformance of the Numis Large Cap Index over the last two years highlights the scale of UK inflows from overseas investors as they start unwinding their underweight positions in low-beta equities.
Discussing the performance, Windham noted that in general, the trust’s portfolio is invested in stocks that have relatively strong balance sheets, and hence, even if there is a delay in meeting their current targets, they are unlikely to carry the risk of requiring additional risk capital when their share prices are weak. Over the year to April 2023 however, sellers of microcap shares were persistent and tended to outnumber microcap buyers, so the share prices of most microcap stocks fell, even if their prospects remained unchanged. This is the principal reason why the NAV of the trust fell 29.3% this year.
Regarding the fund’s outlook, he continued:
“After the global pandemic, and the giant financial stimulus, global assets valuations rose to very elevated levels in early 2021. Subsequently, over the two years to April 2023, global asset valuations have retreated somewhat, back towards prior norms, due to inflationary pressures and interest rate rises.
“Interestingly, although the UK stock market underperformed most international exchanges during the globalisation decades, over the last two years it has now started outperforming all the international major indices. Specifically, the recent outperformance is all the more impressive given that UK open ended investment companies (“OEICs”) have been redeemed at a near-record pace for several quarters. In our view, this underlines just how undervalued the UK stock market had become over the globalisation decades when assets paying good and growing dividends were outpaced by those with ambitious growth targets.
“During the globalisation decades, UK-quoted microcaps were also overlooked. Whilst they did outperform during the year to April 2021, as few pay significant dividends, their share prices have been vulnerable to the global decline in asset valuations and the ongoing selling of UK equities over the last two years. The share prices of quoted microcaps have underperformed those of the UK majors by a very wide margin. Since many were undervalued relative to the UK majors even prior this underperformance, microcaps are in many cases now standing on low valuations in our view.
“Clearly, the rise in interest rates and the economic slowdown will have reduced the longer-term prospects for some. But when their prospects are considered in absolute terms, it should be remembered that corporate sales tend to rise with inflation. In addition, those with strong balance sheets stand at an advantage compared to those which are capital constrained. Furthermore, if there is a major rise in corporate insolvencies, then those that are well financed can expand into the vacated markets, or acquire the overindebted but otherwise viable businesses, debt-free from the receiver at very low prices.
“The bottom line is that despite the current economic slowdown and weak microcap share prices, we believe the prospects for most of the Trust’s holdings are actively improving. Their relatively unleveraged balance sheets, and ongoing access to external risk capital (albeit at weak share prices) become all the more valuable when most private competitors are facing increasingly binding debt and capital constraints.”
MINI : Miton Micro cap suffers from UK malaise