“The smaller, the better,” says the London Business School, which has examined the performance of smaller companies since 1955. The compound annual return of the Numis Smaller Companies index, representing the bottom 10% of the UK market, has been 14.7% since then, 3.4% ahead of the All-Share index. The yearly return of the Numis 1000, representing the bottom 2%, has been 16.3%.
Excluding investment companies, there are over 100 listed “micro-cap” companies with market values below £100m, but they only account for 0.2% of the total market by value. Another 50 have market values of £100m-£200m, adding 0.4% of total market value, but the inclusion of listings on Aim, the junior market of the London Stock Exchange, trebles the number of stocks.
Scouring this mass of tiddlers for bargains are two trusts, the River & Mercantile UK Micro Cap Investment Company (LSE: RMMC), launched in late 2014, and the Miton UK MicroCap Trust (LSE: MINI), launched a few months later. Both have assets of a little over £100m; target firms with a market value below £150m; and trade on discounts to net asset value (NAV) of around 3%. However, George Ensor, manager of RMMC, points out that his trust has also returned capital to investors four times, £57m in total, in order to limit its size. It has just 41 holdings and without that limit would have to increase that number or have larger and less liquid holdings. Gervaise Williams, MINI’s manager, is happy with 128 holdings.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The tortoise and the hare
It’s been a story of the tortoise and the hare. RMMC raced away under its first manager, who was then forced to leave owing to an obscure compliance issue. Its investment return has been 143% over five years and 44% over one. MINI has returned 94% over five years, but 92% over one. Both trusts struggled in 2018-2019, but MINI, with a strong bias towards value, struggled more. Having withstood the sell-off in early 2020 better than RMMC, it has since soared. This is probably due to Williams’s focus on “highly cash-generative stocks”.
Choosing between them is tough. Ensor is clearly finding his feet, but lacks Williams’s 30 years of experience. Inevitably, both trusts are full of stocks few people will ever have heard of. Ensor has moderated the growth focus of his predecessor: “growth is important, but we don’t want to overpay for it”. Williams notes that “it’s important not to get carried away by a good story”, though his exposure to information technology companies is, at 14%, ten percentage points higher than Ensor’s. By contrast, Ensor’s exposure to the consumer and healthcare sectors is 32% compared with 17% for Williams.
Unparalleled choice in the UK
Williams sees particular opportunity in “the cyclicality of various financial and commodity micro caps, providing greater upside at a time of recovery from the pandemic. The potential could be even greater if [inflation takes off]. They have been out of favour for so long that it is easy to underestimate the full scale of their upside”. He has pushed exposure to these sectors up to about 40% of the portfolio compared with 32% for RMMC.
Neither trust has any borrowings and both have plenty of cash. As to the outlook, “what remains curious is how easy it is to find attractively valued companies capable of compounding value for shareholders over a multiyear horizon,” says Ensor. “The UK stockmarket is possibly unparalleled from this perspective.” Williams thinks that the low valuations of micro caps provide “better potential for recovery than other areas of the market” and thinks they could be “at the start of a brand-new supercycle”. This corner of the UK market is easily ignored, but promises rich returns for investors in either trust.
-
Trouble brews in B&M as bargain shops take a hitOpinion Once a stock market darling, B&M's share price has slumped. What has gone wrong for bargain shops?
-
US and China reach a ceasefire in their trade war after talks in LondonThe US and China's trading relationship – the most important one in the global economy – is back on track. Will the truce last?
-
Three British small cap bargains to boost profitabilityThree British small caps to invest in, according to Edward Wielechowski of the Odyssean Investment Trust
-
Two small cap investment trusts with growth potentialThese two small cap investment trusts specialise in the market’s tiddlers and both are worth buying, says Max King.
-
Eight small-cap trusts to bet onFunds investing in market minnows are out of favour, but the cycle will turn. Here are the best bets.
-
US small caps to invest inA professional investor tells us what US small caps he’d consider. This week: Jon Brachle, co-portfolio manager, JPMorgan US Smaller Companies Investment Trust
-
3 VCTs to consider as we near the end of the tax yearTips Venture Capital Trusts come with risks, but offer generous tax allowances that could entice investors ahead of the tax increases coming in April.
-
5 small caps to buy in 2024Michael Taylor reviews his 2023 portfolio of Aim stocks and chooses his top small caps for 2024.
-
How venture capital trusts can provide income and growth for pension saversAdvice Venture-capital trusts provide both capital gains and juicy dividends, which makes them the investment vehicle of choice for many pension savers. But they are risky, says David Prosser, so do your homework.
-
Three good value American small-cap stocks to buy nowTips Professional investor Richard de Lisle of the VT De Lisle America Fund picks three American value stocks to buy now.
