Miton UK Microcap Trust ( MINI) has announced its annual results for the year ended 30 April 2024. The company reported a NAV total return of -12.9%, which was well behind the benchmark return of 7.2%. Shares fell 15% with the discount widening to 9.5%. Chairman, Ashe Windham, noted that almost all of the damage occurred in the first half of the year, adding that the vast majority of UK microcaps were already standing on unusually low valuations even prior to their share price weakness over this past year.
He commented on the performance:
“With the dearth of buying interest in UK microcaps over the last three years, marginal sellers have dominated the direction of share prices. Every excuse in the book has been rolled out for why institutions and individuals should not buy UK equities – a close Scottish referendum, Brexit, four prime ministers in five years, the UK’s lack of exposure to technology stocks, an egregious 0.5% stamp duty on the purchase of equities not paid by investors in other first-world stock markets, the sudden imposition of an additional tax on North Sea oil producers, a major land war in Europe, and the ongoing conflict in the Middle East. To add insult to injury, the investment trust sector has been discriminated against by the iniquitous double counting of fees such that wealth managers find real difficulties explaining why they should be buying closed-end vehicles for their clients, given the apparently high level of fees.
“Given the continuing mergers of wealth managers, the barriers to liquidity are now so high that in order to attract the selector’s eye, investment trusts need to have market capitalizations of £1bn+. There are precious few of those around. The Association of Investment Companies (AIC) is trying to get the Financial Conduct Authority (FCA) to reverse the cost disclosure position, but the latter does not appear to grasp the urgency, while the government seems unable to appreciate the seriousness resulting from the UK falling from its position as the premier global center for finance. Many large companies are voting with their feet, seeking listings in the US, where valuations are far higher and the climate more benign – even the mighty Shell is contemplating such a move.
“At the end of April, for example, it was reported that Coutts & Co. was cutting its UK equity allocation by almost £2bn from 33% to 2%, even below the UK’s now feeble 3% weighting in global equity indices. The consequence is that UK equities are almost wholly unloved and, as at the end of April 2024, were trading on 12x forward price earnings ratio vs the world on 17x and the US on 21x (source: Bloomberg). The price to book ratios are even more extreme, with the UK on 1.6x, the world on 2.7x, and the US on a lofty 4.4x, while the UK also offers a meaningfully higher dividend yield at 3.8% than both the US (1.4%) and world markets (2.1%). I thought that the nadir of selling of UK equities was reached a year ago, but I was sadly mistaken; as the chart below shows, the rate of selling has in fact accelerated. Capitalism abhors a vacuum, and the recent high and rising level of corporate takeovers of listed companies demonstrates the value to be found in the UK. Canny contrarians are buying UK equities at what appear to be knockdown prices.”
Discussing the company’s prospects, he continued:
“The last three years have been incredibly frustrating for the management teams of numerous UK quoted companies and for our shareholders. UK microcap share prices have steadily declined, even while the underlying companies have often continued to deliver results in line with expectations. While this is disappointing, the trust was set up because quoted microcaps possess extraordinary upside potential. When microcaps succeed, sometimes their share prices can appreciate very dramatically. We liken this to an option-value upside, where the term of the option is open-ended, and its cost comes almost for free, embedded within the quoted microcap share price.
“Currently, the media is marvelling because Nvidia has delivered an annualised return of 86% in sterling terms over the last four years. And yet, the trust’s holding in Yü Group (a microcap exemplar) has appreciated at an annualised rate over the same period of 130%. In short, Yü Group’s share price has risen some 27-fold, compared with Nvidia, which has risen 11-fold.
“Furthermore, after Nvidia’s rise, it has moved up to a high-expectation valuation (price to book of 51.8x), whereas Yü Group is still on a modest valuation – even now its price to book is only 6.2x. Thus, Yü Group still retains bags more upside potential, even in the short term.
“Microcap share prices generally have been severely repressed over the last three years, so these abnormally large upsides have been more infrequent. To catch the discerning investor’s eye, small stocks have to be exceptional. Yü Group is a good example and is currently one of the multi-baggers in the company’s portfolio.
“Hopefully, by the time you read this, the green shoots in UK equities which started emerging in mid-April will have blossomed into something more substantial. The UK is now officially out of recession and ‘animal spirits’ are evident. After largely flatlining since 2000, the UK stock market has recently broken out on the upside. Rather similar to the Japanese stock market, we believe this is the start of a new longer-term trend. In our view, mainstream UK stocks are now set to enter a period when they will outperform their international comparators.
“But the greatest upside potential has always lain within UK-quoted microcaps – and they now are starting from shockingly low valuations. Those that succeed from here have the potential to perform much better than large caps. The old stock exchange adage that ‘elephants don’t gallop’ is normally the rule. If the UK stock market itself may be starting a long-term trend of outperformance, and if UK microcaps outperform the UK majors as they have done historically, then they are set to outperform international comparatives.
“In conclusion, it is hard to overstate the scale of the current upside potential for the Miton UK Microcap Trust in absolute terms, as well as in the context of other equities internationally.”
MINI : Big miss for Miton UK Microcap