Miton UK Micro Cap - Half-year Report

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 or as MINI in the text of this Report. The Company's Board (which consists of four independent Directors) appoints the Investment Manager and is responsible for monitoring its performance.

Summary of Results

 

31 October    

2018    

30 April    

2018    

Total net assets attributable to equity shareholders (£'000)

92,218    

118,665    

NAV per Ordinary share

60.41p   

69.33p   

Share price (mid)

57.00p   

65.80p   

Discount to NAV

(5.64)% 

(5.09)% 

Revenue return per Ordinary share

0.12p   

0.27p   

Total return per Ordinary share

(8.53)p  

5.42p   

Ongoing charges

1.47%* 

1.41%  

Ordinary shares in issue

152,653.822**   

171,151,514     

Estimated as at 31 October 2018 in accordance with Association of Investment Companies ("AIC") guidelines. Ongoing charges are the Company's annualised revenue and capitalised expenses (excluding finance costs and certain non-recurring items) expressed as a percentage of the average monthly net assets of the Company during the year.

** On 15 May 2018, the Company redeemed 18,497,692 Ordinary shares pursuant to its voluntary redemption facility.

Update on 2019 Annual Redemption

The Board has decided that the redemption date in 2019 will be moved from 30 April to the end of June, with the Redemption Point now intended to be 28 June 2019. As the existing timetable is so close to Brexit, including an indicated latest date for the receipt of redemption requests of 29 March 2019, the Board does not believe that keeping to the existing timetable, when markets may well be in a period of turmoil, is in the interest of shareholders taken as a whole. The Board retains the discretion to further amend this timetable given the ongoing uncertainty as to the eventual Brexit timetable as at the date of publication of this Report.

CHAIRMAN'S STATEMENT

This Half-year Report covers the six months to 31 October 2018, which has been a challenging period for markets, influenced by concerns over slowing world growth and, in the UK, the outcome of Brexit negotiations.

Returns

The FTSE AIM All-Share Index fell back 6.7% over the half year, whilst the FTSE SmallCap Index (excluding Investment Trusts) fell 9.0%. The smaller fall in the AIM All-Share Index was because many of the larger AIM growth stocks had performed well prior to the October setback.

The NAV of the Company fell 12.4% over the same period, somewhat behind its comparators. As outlined in the Manager's Report, the bulk of the return on the portfolio reflected the general move in markets, although the half-year outcome suffered when one of the longer-term holdings, Yu Group plc, fell sharply in October.

Generally, the Company has an objective to deliver an attractive capital return for shareholders over the longer term through investing in a diversified portfolio of overlooked microcap stocks. The first three and half years since the Company was listed have been marked by unusually strong momentum in larger AIM growth stocks, with the FTSE AIM All-Share Index up 29.5% over the period. Even so, the Company's NAV has appreciated by 11.4p per share or 23.3% over the same period, which compares favourably with the 10.5% capital gain on the FTSE SmallCap Index (excluding Investment Trusts).

Share Redemptions

The share price of the Company reflects the balance of buyers and sellers on the exchange, and hence when there is an imbalance, the share price can diverge from the NAV. In order to help ensure imbalances are kept to a minimum, the Company offers shareholders the option each year to redeem their shares. This year, 18,497,692 shares were redeemed at the end of April, representing around 10.8% of share capital.

The Board has decided that the redemption date in 2019 will be moved from 30 April to the end of June, with the Redemption Point now intended to be 28 June 2019. As the existing timetable is so close to Brexit, including an indicated latest date for the receipt of redemption requests of 29 March 2019, the Board does not believe that keeping to the existing timetable, when markets may well be in a period of turmoil, is in the interest of shareholders taken as a whole. The Board retains the discretion to further amend this timetable given the ongoing uncertainty as to the eventual Brexit timetable as at the date of publication of this Report.

Strategy

The Company principally invests in UK quoted companies with market capitalisations of up to £150 million - businesses typically with corporate agility and access to external capital.  Such companies have the advantage of being able to identify and fund promising projects that can make a transformational difference to their growth.  Thus, as a group, they have a long history of outperforming the mainstream indices.

In general, MINI seeks to invest in companies where the Manager believes their prospects have been overlooked since, over the longer term, companies with these characteristics tend to outperform other smaller stocks.  It is also not unusual for the share prices of faster growing companies to enjoy periods of strong performance, as indeed they have over the last few years. But eventually as markets move on, the Manager believes that overlooked value stocks tend to resume their prior trend of outperformance, thus re-establishing the longer-term pattern.

Towards the end of the half year, the share prices of some growth stocks fell more than those of other companies. If this becomes a trend, we believe the Company's strategy will come into its own. We will update shareholders on this in the monthly factsheets and in the annual report to 30 April 2019.

Prospects

The policy of Quantitative Easing ("QE") helped address the Global Financial Crisis in 2008, but possibly at the longer-term cost of a stagnation in global productivity (given that QE works by distorting market prices). However, QE and the plentiful market liquidity it brings is being phased out across the world.

Furthermore, after a decade of debt issuance in China, inflationary pressures have led to the authorities there bearing down on corporate lending to companies and individuals, even though this has led to a recession in industrial production. During October, the ongoing rise in US interest rates, combined with their position on global trade and tariffs, has brought all these counter-currents to a head, precipitating a broad pull back in share prices.

This is a moment when the three characteristics of our microcap approach, with a strong valuation discipline and a focus on financial robustness, could be of ever greater relevance. Specifically:

1.   Smaller, more agile stocks tend to have greater scope to buck a wider economic slowdown - hence their long history of outperformance. Generally, microcap stocks with a value bias have outperformed by an even greater margin.

2.   Microcaps operate across a wider range of industry sectors than those companies contained in the mainstream indices, which are increasingly dominated by giant global companies in a small number of sectors.  Consequently, their returns are not usually correlated with the daily or monthly moves of the larger quoted companies, which potentially offers diversification for investors.

3.   Lastly, a portfolio of holdings with resilient balance sheets can be a major advantage at a time when other over-borrowed companies may be forced to prioritise the needs of their lenders over their commercial interests.

For these reasons, we continue to believe that the Company is well positioned, despite the current unsettled nature of markets, with scope for renewed interest in the Company's microcap strategy moving forward.

Andy Pomfret

Chairman

13 December 2018