Miton UK MicroCap Trust plc (LON:MINI) fund managers, Gervais Williams and Martin Turner, provide a portfolio update for July 2022.
Although anxiety about European energy supplies remains chronic, during July investors sensed that the adverse stock market momentum was reversing. The improved tone was most pronounced amongst large companies.
When stock market fluctuations are so volatile, the share prices of UK quoted micro-caps can sometimes be overlooked. Hence, during July, the share prices of many companies in the portfolio continued to decline even at a time when the UK stock markets appreciated.
It isn’t unusual for there to be a marked performance differential between a UK quoted micro-cap strategy and other UK quoted smaller company funds or trusts. Longer term we believe the differential could favour the Miton UK MicroCap Trust strategy, as investing across a wide opportunity set of overlooked companies offers the potential to generate better returns. In addition, many micro-cap companies are also operating in markets with structural growth potential, and hence they are less reliant on global growth momentum. Whilst the share prices of some of the micro-cap companies we hold in the portfolio have fallen back during 2022, we favour stocks that generate surplus cash because even if the global recovery is deferred, in general the longer-term potential growth for these companies should hopefully remain in place.
In July last year we bought a FTSE 100 Index Put Option, a position we have held in the past. The Put Option was bought to potentially help lessen the impact to the portfolio in the event of substantial falls in the FTSE 100 Index. Although global markets have been volatile subsequently, the FTSE 100 Index has held up rather better than expected, however, the Put Option holding hasn’t offset the overall fall in the value of those companies held in the portfolio
Whilst many UK company trading statements remain robust, we are unconvinced that inflationary pressures are being supressed as much as hoped. Alongside, we expect rising interest rates could lessen market liquidity (the ability to buy or sell assets easily), and hence stock markets could remain volatile. The cost of a FTSE 100 Index Put option fell low enough in the second half of July to justify extending the length of the current holding. Therefore, we extended the length of the trust’s FTSE 100 Index Put option from December 2022 to December 2023, at a potential cost (if FTSE 100 Index doesn’t suffer a significant setback) of around 1% per annum to the trust’s performance.
Gervais Williams & Martin Turner, Miton UK MicroCap Trust
31.07.2022
