Miton UK Microcap Trust plc (LON:MINI) has announced its annual results for the year ended 30 April 2024 and the publication of its annual report and accounts for the same period, which includes the notice of its 2024 Annual General Meeting.
SUMMARY OF RESULTS
| Year to30 April2024 | Year to30 April2023 | |
| Total net assets attributable to equity shareholders including fair value of warrants (£000) | 43,297 | 60,754 |
| Statutory NAV including fair value of warrants* | 56.29p | 64.20p |
| Adjusted NAV per Ordinary Share* | 55.79p | 64.20p |
| Share price (last close) | 50.50p | 59.50p |
| Discount to Adjusted NAV* | (9.48)% | (7.32)% |
| Investment income | £0.9m | £0.8m |
| Revenue return per Ordinary Share | 0.09p | 0.03p |
| Total return per Ordinary Share including value of warrants | (9.17)р | (28.93)p |
| Ongoing charges#* | 1.99% | 1.72% |
| Ordinary Shares in issue | 76,923,603 | 94,638,561 |
*Alternative Performance Measure. Details provided in the Glossary of the Annual Report. The Adjusted NAV is the Statutory NAV presented in the financial statements adjusted to exclude the fair value of the warrants held by the Trust
#The ongoing charges are calculated in accordance with AIC guidelines.
CHAIRMAN’S STATEMENT
The report covers the full year to 30 April 2024, a period which was, in football parlance, a game of two halves. In the first half to end of October 2023, the Trust’s Adjusted Net Asset Value fell by 15.5%, from 64.20p to 54.10p. The second half saw a tentative recovery with the Adjusted NAV rising by 3.1% to 55.79p. This somewhat anaemic return was greatly outpaced by other indices, as local selling was offset hardly at all by few corporate buybacks within microcaps, and which led to UK-quoted microcap valuations declining even further. Over the period as a whole, therefore, the Trust’s Adjusted NAV fell 12.9%, compared to a rise in the Deutsche Numis Smaller Companies 1000 Index of 7.2%. The vast majority of UK microcaps were already standing on unusually low valuations even prior to their share price weakness over this past year. The low average Price to Book of holdings in the portfolio highlights the value to be found in owning shares in the Trust.
Earnings and Dividends
Earnings for the year, after costs, were 0.09p per share (2023: 0.03p) on the revenue account. Earnings on the capital account consisted of a loss of 9.26p per share (2023: loss of 28.96p). Earnings on the revenue account remain depressed as microcap companies seek to retain cash rather than paying it out in dividends to shareholders. As far as setting the dividend is concerned, the Directors have always given the Manager maximum flexibility to follow which ever course is believed to lead to the best results for our shareholders. As Directors, we regard the dividend as a useful by-product of the investment process but not a target in itself. This year, your Board is recommending a final dividend of 0.09p per ordinary share, reflecting the revenue for the year. Subject to approval by shareholders at the AGM, this will be paid on 25 October 2024 to shareholders on the register on 27 September 2024.
Performance
With the dearth of buying interest in UK microcaps over the last three years, marginal sellers have dominated the direction of share prices. Every excuse in the book has been rolled out for why institutions and individuals should not buy UK equities – a close Scottish referendum, Brexit, four Prime Ministers in five years, the UK’s lack of exposure to technology stocks, an egregious 0.5% stamp duty on the purchase of equities not paid by investors in other first world stock markets, the sudden imposition of an additional tax on North Sea oil producers, a major land war in Europe and the ongoing conflict in the Middle East. To add insult to injury, the investment trust sector has been discriminated against by the iniquitous double counting of fees such that wealth managers find real difficulties explaining why they should be buying closed end vehicles for their clients, given the apparently high level of fees.
Given the continuing mergers of wealth managers, the barriers to liquidity are now so high that in order to attract the selector’s eye, investment trusts need to have market capitalisations of £1bn+. There are precious few of those around. The Association of Investment Companies (AIC) is trying to get the Financial Conduct Authority (FCA) to reverse the cost disclosure position but the latter does not appear to grasp the urgency, whilst the government seems unable to appreciate the seriousness resulting from the UK falling from its position as the premier global centre for finance. Many large companies are voting with their feet, seeking listings in the US, where valuations are far higher and the climate more benign – even the mighty Shell is contemplating such a move.
At the end of April, for example, it was reported that Coutts & Co. was cutting its UK equity allocation by almost £2bn from 33% to 2%, even below the UK’s now feeble 3% weighting in global equity indices. The consequence is that UK equities are almost wholly unloved and, as at the end of April 2024, were trading on 12x forward price earnings ratio vs the world on 17x and the US on 21x, (source: Bloomberg). The Price to Book ratios are even more extreme with the UK on 1.6x, the world on 2.7x and the US on a lofty 4.4x, whilst the UK also offers a meaningfully higher dividend yield at 3.8% than both the US (1.4%) and world markets (2.1%). I thought that the nadir of selling of UK equities was reached a year ago but I was sadly mistaken; as the chart below shows the rate of selling has in fact accelerated. Capitalism abhors a vacuum and the recent high and rising level of corporate take overs of listed companies demonstrates the value to be found in the UK. Canny contrarians are buying UK equities at what appear to be knock down prices.
Prospects
The last three years have been incredibly frustrating for the management teams of numerous UK quoted companies and for our shareholders. UK microcap share prices have steadily declined, even whilst the underlying companies have often continued to deliver results in line with expectations.
Whilst this is disappointing, the Trust was set up because quoted microcaps possess extraordinary upside potential. When microcaps succeed, sometimes their share prices can appreciate very dramatically. We liken this to an option-value upside, where the term of the option is open-ended, and its cost comes almost for free, embedded within the quoted microcap share price.
Currently the media is marvelling because Nvidia has delivered an annualised return of 86% in sterling terms over the last four years. And yet, the Trust’s holding in Yü Group (a microcap exemplar), has appreciated at an annualised rate over the same period of 130%. In short, Yü Group’s share price has risen some 27-fold, compared with Nvidia which has risen 11-fold.
Furthermore, after Nvidia’s rise, it has moved up to a high-expectation valuation (Price to Book of 51.8x), whereas Yü Group is still on a modest valuation – even now its Price to Book is only 6.2x. Thus, Yü Group still retains bags more upside potential, even in the short-term.
Microcap share prices generally have been severely repressed over the last three years, so these abnormally large upsides have been more infrequent. To catch the discerning investor’s eye, small stocks have to be exceptional. Yü Group is a good example and is currently one of the multi-baggers in the Company’s portfolio.
Hopefully, by the time that you read this, the green shoots in UK equities which started emerging in mid-April, will have blossomed into something more substantial. The UK is now officially out of recession and `animal spirits’ are evident. After largely flatlining since 2000, the UK stock market has recently broken out on the upside. Rather similar to the Japanese stock market, we believe this is the start of a new longer-term trend. In our view, the mainstream UK stocks are now set to enter a period when they will outperform their international comparators.
But the greatest upside potential has always lain within UK-quoted microcaps – and they now are starting from shockingly low valuations. Those that succeed from here have the potential to perform so much better than large caps. The old stock exchange adage that `Elephants don’t gallop’ is normally the rule. If the UK stock market itself may be starting a long-term trend of outperformance, and if UK microcaps outperform the UK majors as they have done historically, then they are set to outperform international comparatives.
In conclusion, it is hard to overstate the scale of the current upside potential for the Miton UK Microcap Trust in absolute terms, as well in the context of other equities internationally.
Share Issuance
As the shares did not trade at a premium to the prevailing Adjusted NAV during the year under report, there were no opportunities to issue shares. We will be seeking approval at the AGM in September 2024 to renew this useful facility. Issuing shares at a premium to Adjusted NAV is to the benefit of all shareholders as it dilutes the fixed charges which the Company bears and thus lowers the Ongoing Charges Figure (“OCF”).
Share Redemption
Each year your Directors offer the facility for shareholders to redeem their holdings in part or whole, at or close to the prevailing Adjusted Net Asset Value. The Directors are offering this facility again this year and the timetable is laid out in the annual report. Should the redemption be substantial, then the Directors may take the decision to form a separate redemption pool, as we did last year, and it may take a number of weeks, if not months, to liquidate the pool carefully without disadvantaging the remaining shareholders, or indeed the exiting ones. Thanks to microcaps having been out of favour for almost three years, the Trust has suffered heavy redemptions over each of the last two years, being 13.4% in 2022 and 18.7% in 2023. We have in place an agreement with the Trust’s managers, Premier Miton, that they will rebate their ongoing management fee to the extent required for the Trust to maintain an ongoing charges ratio of no more than 2%. The Trust thus has the facility to remain viable at a lower level of market capitalisation than most investors would believe possible. It is also worth noting that Premier Miton’s fee is based on the Trust’s market capitalisation and not its Adjusted NAV, which, when it is trading at a significant discount, is of material benefit to shareholders.
Board Refreshment
Your Directors have a policy that a non-executive Director should serve for no more than nine years, from the date of first election. A well-structured waterfall of directors’ retirements is always difficult when coming after a company has been launched, as directors should retire nine years after the first election by shareholders. Davina Walter will take over from Peter Dicks as Senior Independent Director on 1 May 2024. Louise Bonham will take over from Peter on 1 September 2024 as Chair of the Audit Committee, whilst Peter will be on hand to help with the redemption process and with the interim results until he retires from the Company at the end of December 2024.
Environmental, Social and Governance (ESG) issues
Your Manager follows Premier Miton’s responsible investing policy, which is to consider Environmental, Social and Governance issues and actively to engage in the investment process with investee companies, in order to deliver improved outcomes for all stakeholders and to take an active approach to voting on company resolutions at annual general meetings of investee companies. Premier Miton has been a signatory of the UN Principles for Responsible Investment since January 2020, an organisation which encourages and supports its signatories to incorporate ESG factors into investment and ownership decisions. Premier Miton also adopts a banned weapons exclusion and utilises third party data to maintain a list of such companies.
Change of Service Providers
As reported in the interim report, following due process, evidenced by extensive due diligence and interviews, on 4 March 2024, the Trust appointed subsidiaries of Northern Trust as company secretary and registered office, fund administrator and depositary, resulting in considerable savings for shareholders.
Annual General Meeting
The Annual General Meeting of the Trust will be held at 11.30am on Tuesday 24 September 2024 at the offices of Stephenson Harwood, 1 Finsbury Circus, London EC2M 7SH. Your Directors look forward to this opportunity to meet shareholders and especially retail investors, as there are few other opportunities to engage with the latter. Aside from the formal business of the AGM, Gervais Williams and Martin Turner will give a presentation on the Trust’s prospects and at the end of proceedings we will be offering a sandwich lunch. We hope that as many shareholders as possible will be able to attend and would encourage those wishing to do so to register their interest via a link that will be available on the Trust’s website, www.mitonukmicrocaptrust.com, in the preceding six weeks. There you will also find additional details regarding the Trust including factsheets and a range of regularly updated videos, podcasts and articles.
In conclusion, as I wrote in my last report, the Directors are grateful for your tolerance in holding the Trust’s shares over what has been a fairly dismal period and we are hopeful that your patience will be amply rewarded in the not-too-distant future. Two of your Directors added materially to their holdings over the year, demonstrating their confidence in the long term prospects for the Company.
Ashe Windham
Chairman, Miton UK MicroCap Trust
11 July 2024
Miton UK MicroCap Trust (LON:MINI) intends to invest primarily in the smallest companies, measured by their market capitalisation and quoted or traded on an exchange in the United Kingdom.
