“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.
-
Stamp duty calculator: how much of a UK sold house price is taxed?Our stamp duty calculator shows you how much the tax will cost you, depending on which band the house price you’re paying falls into.
-
Investors return to equity funds – green shoots or end-of-tax-year blip?Equity funds saw net inflows in March for the first time in over three years. What’s driving this behaviour, and which regions are proving most popular?
-
Top-quality, rapidly growing European stocks are selling at enticing valuationsTimothy Lewis, portfolio manager at JPMorgan European Growth & Income tells us where he’d put his money
-
AstraZeneca CEO’s £1.8mn pay rise approved despite shareholder oppositionAstraZeneca hiked its dividend to persuade shareholders to accept CEO Pascal Soriot’s pay rise. Is he worth his salary?
-
Adidas, Nike or Jordans - could collectable trainers make you rich?The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
-
The industry at the heart of global technologyThe semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
-
Three emerging Asian markets to invest inProfessional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
-
What to consider before investing in small-cap indexesSmall-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
-
Why space investments are the way to go for investorsSpace investments will change our world beyond recognition, UK investors should take note
-
Time to tap into Africa’s mobile money boomFavourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
