Miton UK MicroCap (MINI)

11/07/2023

Results analysis from Kepler Trust Intelligence

Miton UK MicroCap (MINI) has released its financial results for the year ending 30/04/2023. Over the year, the trust has seen its NAV decline by 29.3% on a total return basis, which compares to a total return of -11.2% for the Numis 1000 Index and the average return of -7.7% for the AIC UK Smaller Companies sector.

The trust's discount widened from 5.0% to 7.3%, over the financial year. However, in the subsequent period it has again narrowed to 5.2%. The redemption mechanism helps the trust to trade at a narrower discount than the peer group's simple average which is currently 14.6%.

Chairman Ashe Windham commented "…your directors believe that Miton UK MicroCap Trust has the potential to have bursts of strong returns." He added, "When quoted microcaps start at what we consider to be extraordinarily low valuations, combined with such modest institutional allocations, favorable trends can be sustained over the coming decade or two."

Kepler View

The most recent financial year has proven challenging for Miton UK MicroCap (MINI). The ongoing volatility in financial markets fueled by the uncertain path of inflation and interest rates have had a disproportionate effect on small and micro-cap stocks in particular. However, we believe MINI offers investors a genuine diversification opportunity through its concentration of holdings at the smaller end of the market cap spectrum, which has proven that in the right environment can generate significant outperformance.

It is hard to escape the inherent volatility associated with small and microcap investing particularly during uncertain times. According to the managers, the reactions from investors from near misses or even when stocks exceeded the forecast has either been overdone on the downside or muted on the upside. Gervais and Martin believe this period of uncertainty may provide a longer-term opportunity for the trust. Gervais argues the underperformance of the small and microcaps has opened up a number of opportunities at unusually low valuations which appear to have disproportionate upside potential, that during uncertain times can also enhance the diversification across the portfolio's holdings.

Finally, the board continues to offer shareholders access to the annual redemption facility which should provide reassurance to investors by providing some downside protection to the value of their investment by ensuring they will be able to buy and sell relatively close to par, which in our view enhances the risk/reward characteristics of the strategy. With the trust currently trading at a discount of 5.2%, this may prove an attractive entry opportunity - particularly given MINI's ability to generate exceptional returns if the economic environment permits, as demonstrated by the NAV total return of 277% generated between March 2020 and May 2021.

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