Miton UK MicroCap (LON:MINI) provides investors with rare exposure to the exponential growth potential on offer at the very smallest end of the UK equity market. As discussed in Portfolio, the strategy is less correlated to the market than typical large-cap focussed UK equity strategies, with 77% allocated to the more obscure AIM market. Additionally, the average market cap is £56m, significantly lower than the £412m average of the Numis Smaller Companies ex Investment Companies Index. MINI is managed by longstanding UK equities specialists, Gervais Williams and Martin Turner, who aim to minimise stock specific and sector risks associated with the investment universe through diversification across a wide range of sectors and 140 holdings.
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It’s difficult to believe that small- and micro-cap UK equities have much further to fall. Although there are always risks associated with small- and micro-cap investing, we believe the strong performance of several stocks in MINI’s portfolio, including Yu Group which has risen over ten-fold over the last three years to mid-August 2023, highlights the potential asymmetric returns that can be achieved. With inflation sticky and the cost of debt higher than it has been over the last decade, the strength of a company’s management team and ability to allocate capital effectively, alongside high customer satisfaction ratings, may be able to help dampen margin pressures. Given the attractiveness of valuations and underweight allocations to the UK and the sector, there may be opportunities for surplus cash-generating companies to acquire debt-free businesses at knock-down valuations, which could boost returns in the sector.
We believe Miton UK MicroCap offers investors a genuine diversification opportunity that should complement an investor’s more traditional exposure to more highly valued, large-cap focussed strategies which may be vulnerable to a price correction. Over the long run, in our view, the relatively low levels of discount volatility and the voluntary annual redemption facility ensure shareholders can buy and sell relatively close to par which enhances the risk/reward characteristics of the strategy. Although the environment may remain challenging for MINI and the sector in the short term, Gervais and Martin’s diversified allocations across sectors and holdings means they are well positioned to manage the risks and capture a shift in investor sentiment should it occur. That said, in recent weeks, MINI’s NAV has made strong gains while the share price has been muted. This could prove to be the beginning of a rebound, with the potential for a narrowing discount to add to returns.