Miton UK MicroCap (MINI)
16/07/2024
Results analysis from Kepler Trust
Intelligence
Miton UK MicroCap (MINI)'s
universe of UK's smallest quoted companies has been out of favour
in recent years, and over the financial year ending 30/04/2024
drove MINI to a loss.
The NAV total return
(adjusted for the company's holdings in warrants) was -12.9%, while
the Numis SC 1000 Index (not a formal benchmark, but a useful
comparator) was up 7.2%.
Holdings Yu Group and Serabi
Gold showed the powerful return potential in micro-caps, rising
200% and 143% over the period. However, they could not offset a
general malaise in the sector.
Micro-caps remain cheap
compared to larger companies, and even the trust's strongest
performers remain on relatively modest valuations. The managers
highlight that Yu Group's P/B of 6.2x compared to 52x for Nvidia's.
With the UK starting to outperform in recent months, they argue the
stage is set for a potentially powerful
rebound.
Chairman of the board Ashe
Windham said: "It is hard to overstate the scale of the current
upside potential for the Miton UK Microcap Trust in absolute
terms."
Kepler
View
Multiple trends have been
working against Miton UK MicroCap (MINI) for a few years, but there
are tentative signs that the currents may be shifting. The UK has
been out of favour for some time, while small and mid caps have
been particularly unloved - part of a global trend to favour the
largest companies. However, a combination of good economic growth
and lower valuations being rewarded with greater overseas interest
has led to UK markets picking up over the past year. The recent
general election result is also being seen as positive by many
market participants, as the new government looks likely to be more
stable and is secure with a large majority. MINI should benefit
from a renewed interest in UK stocks, but what it really needs is
for investors to start getting excited about small caps
again.
We won't try to forecast when
this will happen, but we note that all trends eventually reverse,
and Nvidia's growth has started to slow in recent months. We think
it may be that lower rates and better economic growth could see
more money looking for opportunities in the equity market, and the
high growth potential and low valuations of micro-caps could then
start to catch investors' eyes. In particular, we think an easing
funding environment could be important when it comes to improving
sentiment towards micro-caps, as it is one risk factor investors
may be wary of. A lower cost of debt funding should also reduce the
need for companies to undertake dilutive rights issues, which the
managers note has seen companies particularly harshly punished in
recent years.
We think MINI's upside looks
almost option-like. Valuations and sentiment are so low, that the
potential upside if both shift is exceptionally high, while the
downside could be limited. From a shareholder's perspective, the
annual redemption window helps reduce the downside too, as it means
shareholders should be able to redeem at close to NAV rather than
sell on a wide discount in the market. We think the managers'
conviction in this opportunity is shown by the decision to rebate
the management fee in order to keep the OCF economic for
shareholders. In our view this shows their confidence that the
strategy can perform well again, as it did when delivering
exceptional returns in 2020/2021.
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