Montanaro European Smaller Companies Trust (MTE) has announced its interim results for the six months to September 30 2023. The company’s share price total return was down 13.2%, while NAV per share fell 12.5%, underperforming the company’s benchmark, MSCI Europe ex-UK SmallCap index, which was down 7.5%. The discount widened to 13.8%.
Commenting on the performance, chairman R M Curling noted that while disappointing, it was not unexpected given the environment: ‘growth’ companies have underperformed ‘value’ and high quality companies have underperformed low quality. Montanaro seeks to invest exclusively in high quality, growing companies and so these style shifts acted as a significant headwind during the period.
Regarding the outlook, he added:
“Smaller companies have had a torrid time in recent years. In Continental Europe, they have underperformed their larger counterparts by more than 17% over both three- and five-year periods. Despite this, they have outperformed significantly over longer time periods. At the end of October 2023 they were trading at levels previously only seen in times of extreme stress. This suggests that small companies look cheap when compared to their larger counterparts.
“It is historically unusual for quality growth companies to underperform during bear markets. Usually as recessionary fears rise and markets fall, investors seek the sanctuary of companies with high recurring revenues, defensive end markets and strong balance sheets. This time has been different because the drawdown in stock prices has been predominantly driven by a rapid rise in inflation and interest rates.
“It remains to be seen what the future trajectory of interest rates will be but it is clear from listening to companies on the ground that the effects are now being felt in the “real” economy. Companies with stretched balance sheets are finding it increasingly difficult to roll over their debts, which heightens the risk of corporate defaults. However, we believe that your companies are well insulated from the risk of balance sheet stress, as nearly half of the portfolio has net cash on the balance sheet and the average Net Debt / EBITDA ratio for 2023 is a mere 0.3x.
“As the high quality, structurally growing companies in which your company invests are well suited to more difficult economic environments, we would expect investors to start re-appraising the relative attractiveness of the company’s portfolio. This, coupled with highly attractive valuations for the asset class, means that we can look forward to the future with confidence.”
MTE : Quality and small cap bias hurts MTE