Fund profile – a strengthened investment process

More information is available at the manager’s website www.montanaro.co.uk/muscit

MTU aims to make long-term investments in UK smaller companies that it identifies as high quality. It seeks capital growth while offering shareholders a dividend yield of 1.5% of NAV each quarter, or approximately 6% of NAV per annum, funded by a combination of revenue and capital profits.

Montanaro Asset Management Limited (MAML) is the trust’s AIFM. Charles Montanaro established the firm 35 years ago, and MTU was launched in March 1995 with Charles as its lead manager. His son Adam is MTU’s back-up manager. MAML has over £2bn of AUM, no debt, no outside shareholders, and a client base described by the company as “blue chip.” The company states that this platform allows it to take a long-term approach, including investing in its team during market downturns.

One of the largest teams in Europe focused on researching and investing in quoted small- and mid-cap companies

MAML has one of the largest teams in Europe focused on researching and investing in quoted small- and mid-cap companies. Three new recruits (two experienced analysts and a quantitative researcher) are expected to join its existing multi-lingual and multi-national team of 14 analysts and portfolio managers, and 21 support staff. Members of the team own around 35% of MAML, which Charles describes as contributing to a family culture within the business. Half the team has been at MAML for over a decade. Members of the team are encouraged to invest alongside their clients, which is intended to create an alignment of interest.

A detailed description of MAML’s stock selection approach was provided in our previous note. While the underlying philosophy and process have not changed, the manager states that they continually seek to improve outcomes for investors.

A more diversified portfolio, with a broader definition of “quality growth”, making use of technology

Since the last publication, MAML has broadened and diversified MTU’s portfolio, raising the target number of stocks to 50–60. As part of this, the manager decided to broaden its definition of quality growth to include companies exhibiting both structural and cyclical growth.

MAML has also continued to invest in its systems, including in its new proprietary data insights platform. The team has access to a broad range of AI tools that operate within a secure environment. These tools assist the analysts and portfolio managers in areas such as identifying emerging investment themes, performing due diligence on new investment ideas (with a goal of speeding up that process), incorporating real-time company trading data into the investment process, looking for accounting red flags, and analysing or summarising insights from third-party firms such as Third Bridge, Guidepoint, and AlphaSense. Time that was previously spent on processing data manually appears to be redirected into activities described as higher-value thinking and discussion.

An analysis of sustainability remains part of MAML’s investment approach. The firm has managed an “impact” strategy for over a decade and became a “B Corp” in 2019.

The trust is benchmarked against the Deutsche Numis Smaller Companies (excluding investment companies) Index, and the MSCI UK Index has also been used in this report. However, according to the trust, the benchmark does not determine which stocks are selected for the portfolio or how large positions are as a percentage of net assets.

UK, quality, and small-cap are all out of favour

UK stocks appear cheap relative to peers – 12.3x current year earnings versus 19.9x for MSCI World

As Figure 1 shows, UK stocks have underperformed peers for over a decade. It appears that this trend may have stabilised more recently. The causes have been widely debated; Brexit is often cited, as are the state of the UK’s finances and high energy costs.

The UK’s large-cap stocks also tend to be weighted towards value sectors. Investors appeared to show a preference for “growth” over “value” during the period following the 2008 financial crisis, when interest rates and inflation were relatively low, which may have affected performance. This period ended towards the end of 2021, which appears to mark the start of a small uptick in the UK’s relative performance.

Figure 1: MSCI UK versus MSCI ACWI

Figure 2: MSCI ACWI Quality versus MSCI ACWI

UK stocks classified as “quality” and “growth” have been amongst the worst-performing, especially over the past 12 months

The underperformance of “quality” appears to be a more recent phenomenon following a period where a bias to quality was rewarded. Figure 2 shows the global picture, while the table in Figure 3 provides some performance numbers for the UK market. The dispersion in the one-year returns appears to be notable.

Figure 3: Returns of MSCI UK style factor indices for periods ending 30 April 2026

The reason most often cited for the underperformance of quality style investments is that they became relatively expensive, particularly around the COVID period. More recently, concerns about the potential impact of AI on the business models of several software and data companies previously regarded as quality businesses have also been mentioned as factors that may have affected share prices.

The underperformance of small cap versus large cap may be coming to an end

The underperformance of small caps versus large caps is also a longstanding global trend. However, in many countries there are indications that this trend may be coming to an end. Figure 4 shows a significant sell-off in UK small caps relative to large caps that began in August 2021, as expectations of interest rate rises increased. However, over a longer time frame, the period of outperformance by small caps that began in March 2020 – when COVID emerged and interest rates were reduced – appears short-lived within a broader downward trend that began in 2018.

Figure 4: Deutsche Numis Small Cap ex Investment Companies versus MSCI UK

Figure 5: Deutsche Numis Small Cap ex Investment Companies versus Deutsche Numis Large Cap

Figure 5, which uses data supplied by MAML, shows that over the long term, small caps have tended to outperform large caps (2.8% outperformance per annum for 70 years equates to returns for small caps that are almost six times higher than the return on large caps). Management states that this may be due to factors such as it being easier to grow from a smaller base, small caps potentially being more nimble, and a relative lack of research possibly leading to a greater propensity for them to be mispriced.

Prolonged periods of small-cap underperformance have happened before, but do not last forever

The 1990s included several events such as the oil price spike associated with the First Gulf War, the bursting of Japan’s asset bubble, the Asian financial crisis, the collapse of LTCM, the Russian financial crisis, and the rise of the dotcom bubble. Some observers have noted parallels between that period and the current environment. Small caps subsequently recovered following this period.

MAML reported signs of improvement in MTU’s relative returns in Q1 2026, noting that it ranked in the first quartile of UK small-cap funds over that period according to Morningstar. There was a modest improvement in the relative performance of small-cap growth compared to small-cap value, while for the first time since 2020, AIM stocks outperformed main market small-cap stocks.

The low valuations of UK small caps, as shown in Figure 6 and relative to UK large-cap stocks in Figure 7, indicate that there may be further potential for growth.

Figure 6: UK small-cap 12m forward P/E

Figure 7: UK small- versus large-cap P/E

Figure 8 plots annualised five-year total returns on the Numis Smaller Companies Index over periods starting in December 1978 (the blue circles). The vertical axis shows the subsequent five-year return, and the horizontal axis represents the cyclically-adjusted (Shiller) P/E at the beginning of the five-year period. The analysis suggests that a starting P/E of 16.4x at the end of March 2026 could be associated with returns of between 10% and 20% per annum over the next five years.

Figure 8: UK small- cap annualised five-year return versus starting 10-year Shiller P/E

The catalyst for a change in sentiment appears difficult to predict, but the mechanism for a re-rating of UK small caps may be easier to envisage. Money has been flowing out of UK small-cap funds on a significant scale over the past four years – £4.9bn of net outflows according to the Investment Association. If market conditions change, improving small-cap returns could attract renewed interest, which may contribute to further positive momentum.

Asset allocation

As of 31 March 2026, MTU held 59 portfolio companies, an increase from the 40 holdings it had one year earlier. The manager attributes this change to enhancements to the investment process discussed on page 3.

Looking at the breakdown of the portfolio by sector, the main changes over the past year have been an increase in exposure to basic materials (+6pp) and a reduction in exposure to technology (-9pp).

Figure 9: MTU sector split at 31 March 2026

Figure 10: MTU sector split at 31 March 2025

The shift in the portfolio’s market cap distribution towards slightly smaller companies, particularly those in the £250m–£500m range, reflects the opportunities that the manager identified in this part of the market.

Figure 11: MTU split by market cap at 31 March 2026

Figure 12: MTU split by market cap at 31 March 2025

Overall, the portfolio has a fairly high (81.8%) active share relative to its benchmark and is slightly less volatile, with a beta of 0.88 and three-year standard deviation of 14.2%, which compares to the index’s 14.8%.

Reflecting the valuation levels in UK small caps, the portfolio was valued at 13.6x 2026 earnings or 10.3x EV/EBITDA at the end of March 2026. This is alongside prospective annual earnings growth of 12.8% and an ROE of 14.4%. The balance sheets in the portfolio show an average net debt/equity of 0.4%.

An analysis of revenue by geography for the portfolio indicates that approximately half (52%) of revenues are from the UK, with around 19% from North America, 12% from Western Europe, and 8% from Asia.

Top 10 holdings

Since our last note, which used 31 March 2025 data, there have been six new entrants to MTU’s top 10: IntegraFin Holdings, Bloomsbury Publishing, Cranswick, MP Evans, Luceco, and XP Power.

These replaced Telecom Plus (whose shares fell on the back of weak profit figures in its interim results), Baltic Classifieds (which sold off after a broker downgraded its forecasts to reflect the impact of a new vehicle tax in Estonia, and has since been perceived by some as threatened by agentic AI), Porvair (which is still in the top 20), 4Imprint (which was perceived as being particularly threatened by the imposition of tariffs, but reported flat revenue and profits for 2025 compared to 2024), Bytes Technology Group, and JTC.

Bytes Technology and JTC were exited during Q1 2026. JTC was taken over by Permira at a 50% premium. Bytes Technology performed poorly after posting some disappointing figures, coupled with what some perceived as a poorly handled internal reorganisation.

Figure 13: MTU top 10 equity holdings at 31 March 2026

Looking at the new entrants in more detail:

IntegraFin Holdings

Figure 14: IntegraFin Holdings

IntegraFin (integrafin.co.uk) describes itself as the UK’s leading adviser platform built on proprietary technology. It operates the Transact investment platform, which had £77.8bn of assets under direction at the end of March 2026 (up 18% on the prior year). The number of clients increased from 241k to 255k.

The company is forecasting 11% revenue growth for H1 2026 and, according to management, expects 3% growth in administrative expenses in both 2026 and 2027, which it states could support earnings growth.

Investor platforms were previously viewed as potentially affected by advances in agentic AI, but Q1 2026 results appear to have reduced these concerns.

Bloomsbury Publishing

Figure 15: Bloomsbury Publishing

Bloomsbury Publishing (bloomsbury-ir.co.uk) experienced a sharp selloff in May 2025 following the publication of its annual results, in which profits were below expectations. A trading update released at the beginning of March 2026 appeared to increase interest in the stock. MAML states that Bloomsbury may benefit when the new Harry Potter TV series launches later this year. The manager also notes that two new novels from Sarah J Maas are due in late 2026 or early 2027.

Sarah J Maas was the best-selling author in the United States in 2024 and the No.1 bestselling Fantasy author in the UK in 2025. The company states that its academic publishing business is performing well. Further information is expected when the company publishes its annual results later in May.

Cranswick

Figure 16: Cranswick

UK premium, fresh and added-value food products business Cranswick (cranswick.plc.uk) has been held in MTU’s portfolio for 12 years and has generated a 6.3x return over that time. Its last trading statement covered the Christmas 2025 period and stated that full-year adjusted profit before tax would be towards the upper end of current market expectations.

Cranswick has been growing organically and through small bolt-on acquisitions, adding feed mills and genetics production to its pig business last year, as well as investing in its branded and own-label convenience food range.

MP Evans

Figure 17: MP Evans

MP Evans (mpevans.co.uk) owns oil palm plantations in Indonesia and a stake in a Malaysian property company. Palm oil is used in a wide variety of products including shampoos, cosmetics, ice cream, biscuits, chocolate, and cereals, and demand has grown steadily for decades. Palm oil that has been certified as sustainable makes up about 20% of global supply. MP Evans has over 70,000ha under its management.

The total harvest for 2025 was 1.3m tonnes, up 7% year-on-year, and prices for MP Evans’s palm oil increased from an average of $823 per tonne to $866 per tonne. This appears to have supported revenue and profit growth, with EPS up 24%. The company has increased its dividend ahead of inflation in recent years, up 14% for 2025 over 2024. The company is acquiring additional land, which may contribute to future growth.

Luceco

Figure 18: Luceco

Luceco (lucecoplc.com) is a lighting and electricals business with a product range that includes wiring accessories, LED lighting, and portable power (including EV chargers).

Full-year figures released in March 2026 showed 12% revenue growth in 2025, and higher margins, which contributed to 17% higher adjusted operating profits and 20% EPS growth. The dividend was increased by 20% and the company guided towards higher profits for 2026. The company reported strong cash generation and stated that Luceco has the balance sheet strength to support acquisitions.

MAML highlights Luceco’s EV charging products. Luceco is predicting a 17% CAGR in charger installations through to 2030, but states that there is considerable room for that to be upgraded, noting that a mature EV charging market would be six times the 2025 installed base. The company states that this is part of the opportunity presented by the increasing electrification of the UK economy.

XP Power

Figure 19: XP Power

XP Power (corporate.xppower.com) manufactures AC-DC power supplies, DC-DC converters, high voltage AC-DC and DC-DC equipment, radio frequency (RF) power, three-phase power supplies, and filters for electromagnetic interference. Its products are used in a variety of settings including healthcare, industrials, and semiconductor manufacturing.

US export restrictions affected its Chinese semiconductor business in 2025, and there appears to have been some customer destocking following tariff disruption. MAML states that XP Power is now seeing growing demand across all of its business segments. Its 2025 results show a 28% increase in orders, and the company is guiding towards a possible acceleration of revenue recovery in H2 2026.

New investments

The evolution of the portfolio and the emphasis on increased diversification over the past year is reflected in the number of new positions. These are listed below, grouped by theme and category, with commentary from MAML.

High growth strategic themes

Electrification, energy transition, and grid upgrade

• Hill & Smith (HILS) – UK-headquartered manufacturer of infrastructure products including road safety barriers, galvanising services and electrical grid components.
• Volex (VLX) – Global manufacturer of power products, cable assemblies and complex wiring systems for electric vehicles, data centres and industrial applications.
• Volution Group (FAN) – Manufacturer and supplier of ventilation products and solutions for residential and commercial buildings across the UK and Europe.

Nuclear

• Avingtrans (AVG) – Buy-and-build acquirer of specialist engineering businesses serving the aerospace, energy and medical sectors.
• Goodwin (GDWN) – Family-controlled UK engineer producing high-integrity castings and refractory products for the energy, defence and petrochemical industries.

Defence, security, and space

• Cohort (CHRT) – A UK group of specialist defence technology companies providing electronic systems, sensors and cyber capabilities to military and government customers.
• Filtronic (FTC) – Designer and manufacturer of radio frequency and microwave electronics for defence, space and telecommunications applications, with notable supply links to SpaceX.
• SRT Marine Systems (SRT) – Developer of maritime vessel tracking and coastal surveillance technology based on AIS, supplying coast guards and navies globally.

Indirect/enabling exposure

Resources nationalism, critical minerals, energy security

• Amaroq (AMRQ) – Gold developer and explorer focused on advancing its large-scale Nalunaq gold project in Greenland.
• Capital Ltd (CAPD) – Diversified mining services company providing drilling, blast-hole and geotechnical services predominantly across Sub-Saharan Africa.
• Ecora Royalties (ECOR) – London-listed royalty and streaming company holding a diversified portfolio of royalties over mining assets including copper, cobalt and other critical minerals.

Infrastructure upgrade/environment

• Renew Holdings (RNWH) – Specialist engineering services provider focused on the maintenance and renewal of UK critical infrastructure including rail, nuclear and water.
• Restore (RST) – Data/storage compliance, demand driven by regulation.

Digitalisation, SaaS, data

• Craneware (CRW) – Provider of SaaS-based financial intelligence and analytics software to US hospital and healthcare systems.
• Elixirr International (ELIX) – Challenger management consulting firm offering strategy, digital transformation and innovation services to blue-chip and high-growth clients globally.
• Pinewood Technologies Group (PINE) – Provider of cloud-based dealer management system (DMS) software to automotive retailers across the UK and international markets.

Domestic/consumer

• A.G. Barr (BAG) – Scottish soft drinks manufacturer best known for the iconic IRN-BRU brand, also producing Rubicon, Funkin and other beverages.
• Angling Direct (ANG) – UK’s largest specialist fishing tackle retailer, but currently the smallest company in MTU’s portfolio, operating stores and an e-commerce platform serving anglers across the UK and Europe.
• Hollywood Bowl Group (BOWL) – Operator of the UK’s largest ten-pin bowling and mini-golf estate, with a growing presence in Canada through its Splitsville brand.
• The Beauty Tech Group (TBTG) – Provider of technology-enabled beauty devices and connected personal care products sold under multiple consumer brands.

Financials and real estate

• Derwent London (DLN) – London-focused office REIT specialising in the creative regeneration of commercial property in the West End and Tech Belt areas.
• FRP Advisory Group (FRP) – Specialist advisory firm focused on restructuring, insolvency, debt and corporate finance across the UK mid-market.
• Mortgage Advice Bureau (MAB1) – UK’s largest directly authorised mortgage broker network, connecting consumers with mortgage advisers across the country.
• Rathbones Group (RAT) – UK-based wealth management firm offering discretionary investment management and financial planning services to private clients and charities.
• Savills (SVS) – Global real estate services firm offering transaction advisory, property management and consultancy across residential and commercial markets worldwide.

Performance

The chart in Figure 20 shows the factors described on pages 4–6, where MTU’s three core attributes – UK, quality, and small-cap – have all appeared to be out of favour with investors and may have contributed to MTU’s NAV decline since 2021.

Figure 20: MTU NAV relative to Deutsche Numis Smaller Companies ex Investment Companies Index in total return terms over five years to 30 April 2026

Figure 21: Total return performance over periods ending 30 April 2026

Three months may be too short a period to draw firm conclusions from, but the three-month numbers in Figures 20 and 21 appear to show an improvement. According to the peer group section on page 15, MTU ranked second of eight trusts in the peer group over that period. The Iran war has delayed the UK small-cap recovery but may have increased the valuation opportunity.

Performance attribution

Figures 22 and 23 provide information on which stocks had the largest impact on MTU’s returns relative to its Deutsche Numis ex investment companies Index benchmark over the 12 months ended 31 March 2026.

Contributors

Figure 22: Relative performance positive attribution, 12 months to 31 March 2026

XP Power (which was discussed on page 10) made the largest contribution to returns. Fund administrator JTC and foreign exchange and payments business Alpha Group International were both taken over. MP Evans was discussed on page 9.

Detractors

Figure 23: Relative performance negative attribution, 12 months to 31 March 2026

Hilton Food

Figure 24: Hilton Food

Hilton Food (hiltonfoods.com) is a food processing and packaging company specialising in meat, seafood, and vegetarian products. It was discussed in our previous note. The company experienced a series of profit warnings, with 2025 EPS reported as 8% lower than for 2024. The business faced significant inflation in its raw materials costs, which appears to have affected its Seachill white fish business. In addition, Hilton’s Foppen smoked salmon operations were disrupted as manufacturing was shifted from Greece to the Netherlands in response to restrictions placed on imports by the US Food and Drug Administration (FDA). The FDA stated that unsanitary conditions in Greece were causing issues with Listeria contamination.

Peer group comparison

For the purposes of this report, a subset of investment companies in the AIC’s UK smaller companies subsector has been used as a peer group. Very small trusts, those with unusual capital structures, those focused on an activist approach, and those investing in very small (micro-cap) companies have been excluded. This results in a peer group of eight.

Figure 25: Listed UK smaller companies peer group NAV total return performance over periods ending 30 April 2026

MTU’s quality-focus appears to have held back returns relative to comparative indices, which has placed it towards the lower end of the peer group rankings over most time periods. However, performance appears to be improving in 2026. Aberforth Smaller Companies follows a value style, which, as discussed on page 4, has been more successful over the past few years. Before 2025, Artemis Future Leaders was Invesco Perpetual UK Smaller Companies, but the 1-year figures shown in Figure 25 represent its performance under its current managers.

MTU’s efforts to control its discount have reduced the trust’s size, leaving it towards the smaller end of this peer group (although a number of even-smaller trusts were excluded from this group, as explained above).

MTU trades on the tightest discount of its peers, which may reflect the dividend yield (the highest of this group) and the share buyback activity. This may be beneficial if sentiment towards this area improves.

The peer group appears to have control over running costs, as every investment company that was excluded from this group has higher ongoing expenses. According to management, MTU is controlling its overheads, supported by a management fee of 0.50% on net assets.

Figure 26: Listed UK smaller companies funds, comparison as at 1 May 2026

Enhanced dividend – c.6% yield on NAV

MTU declares and pays dividends quarterly. From December 2024 onwards, each dividend represents 1.5% of the previous quarter end NAV, compared to 1% of NAV previously. For the financial year ended 31 March 2025, MTU earned a net revenue return of 3.3p per share (FY24 3.2p) and declared dividends totalling 5.83p. For the financial year ended 31 March 2026, MTU has declared dividends totalling 6.51p.

At the end of March 2026, the yield on the portfolio was 3.1% and dividends were forecast to grow at 5.6%. The shortfall of revenue from the income account is topped up from distributable capital reserves. At the time of the adoption of the enhanced dividend policy in December 2024, the board estimated that MTU had sufficient distributable reserves to maintain its new dividend policy for 28 years, even if there was no capital or income growth in the underlying portfolio.

Figure 27: MTU ordinary dividends (pence per share)

Premium/(discount)

Figure 28: MTU premium/(discount) over five years ending 30 April 2026

Over the year ending 30 April 2026, MTU’s shares traded within a discount range of 11.7% to 3.9%, with an average discount of 8.2%. As of 5 May 2026, MTU’s shares were trading at a discount of 6.0%.

Over 2026, MTU’s discount appears to have settled in the mid-single digits, which – as discussed on page 16 – is the narrowest in its peer group. The adoption of the enhanced dividend strategy in December 2024 and its buyback programme may have contributed to MTU’s narrower discount.

MTU buys back its shares when the opportunity arises, and since the start of 2025 it has bought back over 30% of its shares. Last November, Saba Capital Management LP sold its entire stake in the company. The pace of share buybacks appears to have slowed since then. MTU has published a circular to convene a meeting on 20 May 2026, at which it will ask shareholders to renew its share buyback authority.

At 1 May 2026, MTU had 167,379,790 shares in issue, 54,348,650 of which were held in treasury, leaving 113,031,140 shares with voting rights.

Figure 29: MTU share buybacks by month over the past year

Previous publications

Readers interested in further information about MTU may wish to read our previous notes listed below. You can read them by clicking on the links or by visiting the QuotedData website.

Figure 30: QuotedData’s previously published notes on MTU

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