Miton UK MicroCap Trust plc (LON:MINI) has presented the Half Year Report of the Company for the half year ended 31 October 2020.
The Miton UK MicroCap Trust plc is an investment trust quoted on the London Stock Exchange under the ticker code MINI. It is referred to as the Company, MINI or the Trust in the text of this report. The board, which consists of five independent directors appoints the Investment Manager and is responsible for monitoring the Trust’s performance.
After the Trust’s listing in April 2015, its net asset value (NAV) rose from 49.00p to 71.60p in June 2018. The gridlock in parliament ahead of Brexit in 2019, and more recently the pandemic-induced recession, led the Company’s NAV to fall back to a nadir of 37.2p on 18 March 2020. Over the six months to October 2020, the Company’s NAV has risen 21.6% (including re-invested dividend) from 51.33p (30 April 2020) to 62.32p. This report details how many of the quoted microcaps in the Company’s portfolio have navigated the unsettled economic conditions and outlines the Company’s prospects going forward.
Results for the Half Year to 31 October 2020
- Over the half year, the Ordinary share NAV rose from 51.33p on 30 April 2020 to 62.32p on 31 October 2020, a rise of 21.6% (including re-invested dividend)*.
- The Ordinary share price moved from 43.55p at the end of April 2020 to 57.00p at the end of October 2020, an increase of 31.7% (including re-invested dividend)*.
- A loss of £125,000 in the half year to 31 October 2020 has been debited to the revenue reserves.
Summary of Results
| Half year to 31 October 2020 | Year ended 30 April 2020 | |
| Total net assets attributable to equity shareholders (£’000) | 69,349 | 71,011 |
| NAV per Ordinary share | 62.32p | 51.33p |
| Share price (mid) | 57.00p | 43.35p |
| Discount to NAV* | (8.54)% | (15.55)% |
| Investment Income | £0.3m | £0.8m |
| Revenue return per Ordinary share | (0.10)p | 0.06p |
| Total return per Ordinary share* | 11.62p | (4.67)p |
| Ongoing charges#* | 1.61% | 1.68% |
| Ordinary shares in issue | 111,274,758 | 138,335,915 |
*Alternative Performance Measure (‘APM’). Details provided in the Glossary in the Half Year Report.
#The ongoing charges are calculated in accordance with AIC guidelines.
CHAIRMAN’S STATEMENT
This report covers the six-month period between 30 April and 31 October 2020, a period when many stock markets staged a recovery after dramatic falls in the early part of the year caused by the COVID-19 pandemic.
Returns over the half year
The pandemic has been the dominant issue of the period under review, however, the sheer scale of government support for businesses, along with additional financial stimulus from central banks, led to a marked recovery in global stock markets. With Brexit uncertainties ongoing, however, the mainstream UK equity indices didn’t really participate and the FSTE All-Share Index fell 2.0% over the six months to the end of October, even with dividend income included.
As microcaps are relatively young businesses, many can often sustain growth even during a recession and the performance of your Trust demonstrated that. The Net Asset Value (“NAV”) total return of the Trust was 21.6% (including re-invested dividend) over the six month period.
In the half year, the costs of the Trust were slightly greater than the dividend revenue received. As a result, the NAV return outlined above includes a revenue deficit per share of 0.10p over this period, which compares to a positive revenue return of 0.06p per share last year. It has always been anticipated, however, that capital appreciation would be the principal driver of the Trust’s return.
Returns since the Trust was first listed in April 2015
The share prices of numerous high-profile, US technology stocks have appreciated very substantially over the five and half years since the Trust first listed in April 2015. In total return terms, the NASDAQ Composite Index for example, has risen by 178.9% in Sterling terms between April 2015 and October 2020.
Over the same period, returns on UK equities have been overshadowed by uncertainties over Brexit, and more recently by the pandemic, resulting in numerous business setbacks. As a result, the total return on the FTSE All-Share Index is only 2.7% over the five and a half years to October 2020 (dividend income included), while the return on the Trust is 29.5%. Over the same period, the total return on the FTSE SmallCap Index (excluding Investment Trusts) is 8.2% and on the FTSE AIM All-Share Index is 35.4%. These figures imply that while many UK quoted business have grown since April 2015, this has been offset by reductions in market valuations over the period. Despite the potential for the Trust’s portfolio to deliver premium returns going forward, its weighted price/book value stood at a discount to that of the FTSE All-Share Index and the FTSE AIM All-Share Index at the end of October 2020.
Share Redemptions
Since the Trust’s share price reflects the balance of buyers and seller, when there is an imbalance, the Trust’s share price can diverge from its NAV. Over the half year under review, while the Trust’s share price has risen with its NAV, it has remained at an average discount of 13.1%, although this had narrowed to 8.5% by the end of the period. In order to help to reduce such imbalances over the longer term, the Trust offers all shareholders the option to redeem their shares each year, subject to the Board’s discretion.
This year, at the redemption point on 30 June 2020, 27,061,157 shares were offered for redemption, amounting to 19.56% of the share capital. The redemption was funded by transferring a pro rata tranche of all the Trust’s holdings into a redemption pool to enable them to be liquidated. On liquidation of the redemption pool, redeeming shareholders received 55.41p per share (including a dividend of 0.10p which was declared and paid prior to the capital being returned).
Board refreshment
On 1 December we were pleased to welcome Bridget Guerin on to the Board as a non-executive Director and Chair-elect. Bridget will take over from me when I step down at the next AGM. This is the first step in implementing our Board succession plan. The other members of the Board were all appointed at the time of listing in the Company in 2015 and, under the current governance rules they will all need to be replaced by 2024. I believe it is in the best interests of the Company for a new Chair to oversee that process and be responsible for forming the new Board.
Dividend
Over the half year to October 2020, the process of portfolio refreshment as holdings mature; has led to significant changes in the portfolio. This, together with some takeovers and some companies choosing to defer or cancel dividends as a consequence of the pandemic, has resulted in the Trust’s dividend income falling compared with the same period last year. This has resulted in the Trust’s revenue per share being below its ongoing costs.
Historically, the Trust has been able to distribute a small annual dividend but, for the reasons above, this is seen as unlikely in the current year.
Prospects
Global growth has been episodic since 2008, with central banks periodically injecting additional financial stimulus via Quantitative Easing to sustain economic momentum. The repeated injection of additional credit has driven up the price of government bonds to extremely high valuations in recent years, simultaneously dragging up the valuations of many other assets.
At the date of this report, the outcome of the Brexit negotiations remains unknown. The strategy and portfolio have shown resilience through the COVID-19 pandemic, and the Managers anticipate that, while there might be short term uncertainties and currency volatility, the final form of Brexit will not change the medium and long term opportunity that exists for the Trust.
Although the pandemic-induced recession will eventually pass, it may be that global growth will remain elusive. Governments will need to scale back their budget deficits via incremental tax rises, at a time when changing customer trends have left numerous companies under existential threat. While these headwinds will be a challenge for all companies, younger business with access to external risk capital, such as quoted microcaps, have the potential of not just surviving but also thriving in these conditions.
At the date of signing, the NAV had increased to 69.31p, being a 11.2% increase since the half year end.
In summary we are increasingly confident in the prospects of the Trust over both the short and longer term.
Andy Pomfret
Chairman
11 December 2020
INVESTMENT MANAGER’S REPORT
Who are the fund managers of the Trust?
Premier Miton Group plc (“Premier Miton”) is an independent, listed fund management company, formed from the merger of Premier Asset Management and Miton Group in November 2019, with a well-established reputation for successfully managing UK-quoted smaller company portfolios over the longer term. The Trust’s Board appointed Miton Group as Manager when it was listed in April 2015.
The day to day management of the Trust’s portfolio continues to be carried out by Gervais Williams and Martin Turner, who came together as a team in April 2011
Martin and Gervais have had a close working relationship since 2004, with complementary expertise that has led them to back a series of successful companies.
Gervais Williams
Gervais joined Miton in March 2011 and is Head of Equities in Premier Miton. He has been an equity fund manager since 1985, including 17 years at Gartmore. He was named Fund Manager of the Year by What Investment? in 2014 and is also a board member of the Quoted Companies Alliance and a member of the AIM Advisory Council.
Martin Turner
Martin joined Miton in May 2011. Martin qualified as a Chartered Accountant with Arthur Anderson and had senior roles and extensive experience at Merrill Lynch and Collins Stewart.
What were the main contributors to the Trust’s outperformance over the half year?
The half year between the end of April 2020 and the end of October 2020 was a period when stock markets around the world rallied following the pandemic-induced recession and market sell-off. Unfortunately, the UK stock market has not recovered in line with others over the half year, given the ongoing anxiety about the nature of the UK’s exit from the EU.
Nonetheless, specialist markets are often resilient during recessions, and the weakness in some competitors can offer additional opportunities for those with good access to capital. During the half year, the share prices of Avacta and Synairgen both appreciated substantially, as their medical technology could be extended to address the needs of the pandemic. Other major contributors to the Trust’s performance were Jubilee Metals, Corero Technology, Trackwise Design, Simec Atlantis and Rockrose Energy, all of whose share prices doubled over the six months, with the share price of Open Oprhan rising thee fold.
The most disappointing holdings over the half year were Kromek and Ethernity Networks which have both been awaiting major orders that have yet to be booked. Another significant detractor was CentralNic, whose share price has drifted lower over the period after a period of outperformance just prior to the half year.
Why was the Trust’s revenue per share negative over the half year?
As the Trust’s holdings mature and start to generate substantial paybacks on their investment, it puts them in a position to scale up their dividends considerably. The share prices of these stocks often appreciate so they no longer stand on such overlooked valuations. In time they are sold and replaced with new holdings earlier in their life cycle and that stand on lower valuations.
Over the half year to October 2020, the process of portfolio refreshment outlined above, some takeovers and some companies choosing to defer or cancel dividends as a consequence of the pandemic has resulted in the Trust’s dividend revenues falling when compared with the same period last year. This has resulted in the Trust’s revenue per share being below its ongoing costs.
The process of taking profits on those holdings that mature and pay dividends to reinvest in less mature stocks has always been anticipated to mean that capital appreciation would be the principal driver of the Trust’s return. This, coupled with the caution of companies towards paying dividends as a result of the pandemic, means the Trust’s revenue per share is expected to remain below its ongoing costs for the year. Historically, the Trust has been able to distribute a small annual dividend but, for the reasons above, this is seen as unlikely in the current year.
What are the main factors driving the Trust’s returns since it first listed in April 2015?
In the UK, an analysis of stock market data since 1955 reveals that the best performing group of stocks has been quoted microcaps with a bias towards those standing on low, overlooked valuations Whilst stocks with these characteristics have not continuously outperformed, their strong performance has been a persistent trend through a variety of economic and stock market conditions. For this reason, the Trust’s strategy focuses on quoted microcaps that are standing on overlooked valuations. When these succeed, their share prices can rise by much greater percentages than most mainstream stocks. This feature has been evident in the Trust’s portfolio over the six months to the end of October 2020.
As noted above, stocks with these characteristics don’t continuously outperform. In the past, overlooked microcaps have lagged the returns of higher-profile, more volatile stocks at times of abundant market liquidity, and investor excitement has driven up those share prices faster than others. The dot-com boom prior to the millennium is a good example of this. As a result of Quantitative Easing, market liquidity has again been in plentiful supply over recent years and share prices of high volatility quoted companies have tended to outperform. As with the dot-com boom, when this favourable period of market liquidity comes to an end, we expect regular quoted companies standing on overlooked valuations to take up the running and outperform more volatile stocks by a considerable margin. We anticipate that this trend will re-emerge in the coming periods, but in the meantime, the Trust’s strategy has faced a headwind over recent years.
In addition, another, more one-off, headwind has inhibited the Trust’s returns. The UK’s decision to leave the EU in June 2016 introduced uncertainty about the details of Brexit, which has held back investor interest in UK-quoted markets, and most particularly has detracted from the returns of UK-quoted small and microcaps. As this uncertainty drops away in the coming period, we anticipate investor interest in UK stocks will normalise.
Despite these two major headwinds since the Trust was listed in April 2015, its total return to October 2020 has been 29.5%. Whilst this return is above the underlying rate of inflation, we believe the returns of the strategy through a full stock market cycle – including periods when regular, overlooked microcaps outperform – will be much greater.
What impact will the pandemic-induced recession have on the Trust?
The global pandemic has precipitated a major recession that has greatly reduced the cash flow generated by numerous companies. Without substantial government payments, unemployment would have increased rapidly, and many companies may have become insolvent. As Managers, we seek to limit the risk by selecting holdings with resilient balance sheets for inclusion in the Trust’s portfolio. Although some may suffer a setback in cash flow during an economic setback, in general, stocks with resilient balance sheet should not run out of cash.
When the economy recovers, additional working capital needs often lead to corporate insolvencies. One of the advantages of quoted microcaps is that they can raise external capital and acquire previously over-borrowed, but otherwise viable, business from the receiver. Such acquisitions often bring in additional skilled staff and generate very good returns on investment, greatly enhancing the recovery prospects of the business. Overall, a global recession is a challenge for all businesses, but at times of recovery, it can provide additional opportunities for quoted microcaps enhancing their future returns.
How unusual is the UK-quoted microcap investment universe?
Prior to a sustained period of globalisation, returns on mainstream stock markets were not very different from that of underlying inflation. At that time, institutional interest in quoted small and microcaps was justified because they delivered better returns. After the policy of globalisation was adopted, mainstream stock market indices delivered unusually strong returns, so quoted small and microcap stocks were increasingly regarded as unnecessary and institutional interest faded. Over the last three decades, this has resulted in the closure of many of the small and microcap stock markets around the word for lack institutional interest.
Fortunately, the UK Government has ensured that the market for quoted small and microcaps remains viable via dedicated tax exemptions, on the grounds that they generate both more skilled employment and increased productivity than the mainstream companies and ultimately contribute additional tax take.
Going forward, the ultra-low yields on bonds imply that prospective returns on mainstream assets will be unusually modest. As this becomes the consensus opinion, we anticipate that the premium returns on quoted small and microcaps will lead to renewed interest from institutions once again. Overall, the prospects for the UK economy may not be very different from others, but the prospects for the UK stock market could be very different due to its wide-ranging, vibrant universe of quoted small and microcaps. Currently, over half of all the companies listed in the UK have a market capitalisation of less than £150m which is a point of difference compared with most other major stock exchanges.
What are the prospects for the Trust?
Looking forward, as successful COVID-19 vaccines are rolled out and consumer spending catches up, bond yields could start rising as significant government deficits drain market liquidity. To some degree, bond markets already appear to be anticipating this trend, with the potential change leading to the start of a fall back in share prices of many high volatility stocks. Overall, market trends could be at an inflexion point, with attention switching back to regular businesses with recovery prospects.
A change such as this would be particularly favourable for the UK stock market, given its large weightings in recovery stocks such as bank and energy companies. If Brexit itself proves not to be chaotic, we believe microcap recovery prospects could be all the greater, because so many are standing on single-digit price earnings multiples.
Alongside, after such a deep recession, many private businesses may well struggle to participate in the recovery for want of capital. Quoted microcaps with strong balance sheets can expand into vacant markets, as well as enhancing their growth prospects in a low-cost acquisitions from the receiver. Overall, we remain confident in both the short and longer term prospects for the Trust.
Gervais Williams and Martin Turner
11 December 2020
PORTFOLIO INFORMATION as at 31 October 2020
| Rank | Company | Sector & main activity | Valuation£’000 | % ofnet assets | Yield* % |
| 1 | Avacta Group | Health Care | 3,129 | 4.5 | – |
| 2 | Cerillion | Technology | 2,266 | 3.3 | 1.7 |
| 3 | Jubilee Metals Group | Basic Materials | 2,252 | 3.3 | – |
| 4 | Corero Network Security | Technology | 2,091 | 3.0 | – |
| 5 | MTI Wireless Edge | Technology | 2,019 | 2.9 | 3.5 |
| 6 | Frontier IP Group | Industrials | 1,827 | 2.6 | – |
| 7 | Trackwise Designs | Industrials | 1,814 | 2.6 | – |
| 8 | Venture Life Group | Health Care | 1,804 | 2.6 | – |
| 9 | Caledonia Mining Corporation | Basic Materials | 1,803 | 2.6 | 3.2 |
| 10 | Inspiration Healthcare Group | Health Care | 1,761 | 2.5 | – |
| Top 10 investments | 20,766 | 29.9 | |||
| 11 | Kape Technologies | Technology | 1,662 | 2.4 | – |
| 12 | Simec Atlantis Energy | Utilities | 1,401 | 2.0 | – |
| 13 | Wey Education | Industrials | 1,348 | 2.0 | – |
| 14 | Totally Ord | Health Care | 1,320 | 1.9 | 2.9 |
| 15 | CentralNic Group | Technology | 1,314 | 1.9 | – |
| 16 | Jadestone Energy | Oil & Gas | 1,214 | 1.8 | – |
| 17 | Amino Technologies | Technology | 1,193 | 1.7 | – |
| 18 | Mode Global Holdings | Financials | 1,056 | 1.5 | – |
| 19 | Gaming Realms | Consumer Services | 987 | 1.4 | – |
| 20 | FRP Advisory Group | Industrials | 945 | 1.4 | 1.0 |
| Top 20 investments | 33,206 | 47.9 | |
| Balance held in equity instruments | 33,923 | 48.9 | |
| Total equity investment | 67,129 | 96.8 | |
| Other net current assets | 2,220 | 3.2 | |
| Net assets | 69,349 | 100.0 |
* Source: Thomson Reuters. Based on historic dividends and therefore not representative of future yield.
| Portfolio exposure by sector (%) | |
| Technology | 21.6 |
| Health Care | 18.6 |
| Industrials | 18.3 |
| Basic Materials | 12.3 |
| Financial Services | 10.4 |
| Oil & Gas | 6.1 |
| Consumer Services | 4.6 |
| Utilities | 4.4 |
| Consumer Goods | 3.5 |
| Telecommunications | 0.2 |
| Actual annual income by sector (%) | |
| Financial Services | 38.0 |
| Oil & Gas | 19.8 |
| Basic Materials | 17.1 |
| Technology | 10.7 |
| Health Care | 8.3 |
| Industries | 2.8 |
| Consumer Services | 2.7 |
| Consumer Goods | 0.6 |
Portfolio by asset allocation
| AIM | 84.9 |
| Other UK Equities | 9.4 |
| FTSE SmallCap Index | 2.3 |
| FTSE Fledgling Index | 2.3 |
| FTSE 250 | 1.1 |
Portfolio by spread of investment income
| AIM | 68.2 |
| Other UK Equities | 26.0 |
| FTSE SmallCap Index | 5.8 |
Source: Thomson Reuters
The tables above set out how the portfolio’s capital is deployed and the source of the semi-annual dividend income in terms of industry sectors. The same data is also shown in terms of the London Stock Exchange FTSE Index in which they are classified or the stock markets on which the holdings are listed. UK smaller quoted companies that are not listed on the London Stock Exchange are normally quoted on the AIM or the NEX exchanges. The portfolio as at 31 October 2020 is set out in detail above, in line with that included in the Balance Sheet. The investment income above comprises the income from the portfolio as included in the Income Statement for the half year ended 31 October 2020. The AIM and NEX market are both UK exchanges specifically set up to meet the requirements of smaller listed companies.
Investment for the Company’s portfolio are principally selected on their individual merits. As the portfolio evolves, the Manager continuously reviews the portfolio’s overall sector and index balance to ensure that it remains in line with the underlying conviction of the Investment Manager. The Investment Policy is set out below and details regarding risk diversification and other policies are set out each year in the Annual Report.
INTERIM MANAGEMENT REPORT AND DIRECTORS’ RESPONSIBILITY STATEMENT
Interim Management Report
The important events that have occurred during the period under review, the key factors influencing the financial statements and any updates to the principal risks and uncertainties for the remaining six months of the financial year are set out in the Chairman’s Statement and the Investment Manager’s Report above.
The principal risks facing the Company are substantially unchanged since the date of the Annual Report and Accounts for the year ended 30 April 2020 and remain as set out in that report on pages 18 to 21.
The Board has, throughout the period, considered risks surrounding the impact of the COVID-19 pandemic. The risks related to market volatility and, in the worst case scenario, a decline in market prices, are continually monitored by Premier Miton and reviewed regularly by the Board.
The risks faced by the Company include, but are not limited to, the availability of suitable investments to execute its investment strategy, reliance on third-party service providers, reliance on key personnel/individuals employed by the Investment Manager, share price volatility and liquidity risk, operational costs which are unrelated to the size of the fund, adverse regulatory or law changes, cyber security risk, legal action by others. The risks arising from the Company’s financial instruments are market risk, liquidity risk and credit and counterparty risk..
Responsibility Statement
The Directors acknowledge responsibility for the Half-Year Financial Report and confirm that to the best of their knowledge:
· the condensed set of financial statements has been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting, as adopted by the European Union; and gives a true and fair view of the assets, liabilities, financial position and loss of the Company as required by the Disclosure Guidance and Transparency Rules (DTR) 4.2.4R; and
· this Half Year Report (including the Chairman’s Statement and Investment Manager’s Report) includes a fair review of the information required by:
a) DTR 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
b) DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so.
This Half Year Report was approved by the Board of Directors on 11 December 2020 and the above responsibility statement was signed on its behalf by Andy Pomfret, Chairman.
