Montanaro UK Smaller Companies discount offsets its NAV growth

Montanaro UK Smaller Companies Investment Trust (MTU) has released its annual results for the 12 months ending 31 March 2024.

• Over the 12 months MTU’s NAV total return was 8.3%, slightly underperforming its benchmark, the Deutsche Numis Smaller Companies (excluding investment companies) Index, which returned 9%. The share price total return was lower at 0.7% as MTU’s discount to NAV widened from 8.3% to 15.1%. Since inception in 1995, MTU has delivered a cumulative 876% NAV total return, far ahead of the benchmark’s 555% return.
• The three major stock-specific drivers of MTU’s returns were XPS Pensions, which benefited from increased demand after the liability-driven-investment crisis (triggered by the brief government of Liz Truss); 4imprint which upgraded forecasts after strong growth, and the acquisition of long-time holding Dechra Pharmaceuticals at a 45% premium. Major detractors included Kainos, Watches of Switzerland, and XP Power.
• MTU paid dividends totalling 4.6p per share for the year, a result of its policy to pay out 1% of NAV each quarter. While this can be funded by MTU’s NAV, 2023’s dividend was mainly funded by revenue returns of 3.2p per share.
• The widening of MTU’s discount was in line with the broader sector, despite efforts to increase the trust’s appeal to retail investors. The board continues to monitor the discount, however no shares were bought back over the period.
• MTU’s ESG profile improved over the year. Montanaro, as overall firm, saw its “B Corporation” score rise from 81.8 to 105.5 (classified as “outstanding”), demonstrating its commitment to continual improvement in ESG.

Charles Montanaro, manager of MTU, commented:

“The supply chain challenges of recent times appear to be normalising and companies are returning to their past ordering and stock patterns. The period of building up raw materials and finished goods “just in case” appears to be over as companies are coming to the end of a programme of destocking.

“Nonetheless, it has been a difficult period for SmallCap.

“SmallCap has outperformed LargeCap in every decade after the Second World War with just one exception: the 1990s, which saw five crises over five years including LTCM, the Asian Crisis and a recession. In times of crisis, investors tend to sell SmallCap and seek refuge in cash and liquidity. Although it is still early days in this decade, already we have seen a pandemic and the Ukraine war with all its ramifications.

“Assuming there are no more black swan events or geo-political crises, we may be entering a more “normal” period when SmallCap typically does well. If inflation and interest rates continue to fall, investor confidence should return. The big lesson of March 2003 and March 2009 is that sentiment is remarkably fickle and can improve both dramatically and quickly. It is important to be invested before the recovery.

“It is customary to write that we look forward to the “future with confidence”. Actions speak louder than words: Montanaro Asset Management recently increased its investment in MUSCIT to over 6%, making us one of the larger investors.”