Boris Johnson’s thumping general election victory saw a swathe of unloved stocks come charging back, with the Gervais Williams-run Miton UK MicroCap Trust (MINI) among them.
Shares in the investment trust reversed more than a year of poor stock price performance to rally 4.7% to 50.9p with investors clearly far more confident that the Prime Minister can get his Brexit deal through Parliament and bring much needed stability to UK equity markets.
Results for the half year ended 31 October showed a disappointing net asset value (NAV) plunge amid a Brexit-anxiety-induced micro cap buyers’ strike.
Yet the removal of key political risks offers a positive catalyst for the stock market’s overlooked micro caps, which fund managers Gervais Williams and Martin Turner insist have the potential for ‘an even greater performance catch-up to come’.
FIRST HALF HURT
NAV fell 12.8% to 48.92p over the six months to October as Brexit-related jitters subdued small cap buyers. The FTSE AIM All-Share Index declined by 8.2% and the FTSE Small Cap index reversed by 5.9%, although micro cap share prices fell further due to their more limited liquidity.
Often agile and fast-growing minnows offering better value relative to larger caps, micro caps typically fly under the radar of big institutional investors more comfortable with larger go-go-growth names such as Boohoo (BOO:AIM) and Fevertree Drinks (FEVR:AIM) than the lesser-known growth hopefuls that Williams (pictured below) and Turner seek.
Names that pass muster with the micro cap specialists include the likes of billing software play Cerillion (CER:AIM), digital security software provider Kape Technologies (KAPE:AIM) and sports nutrition specialist Science in Sport (SIS:AIM).
GOOD RECOVERY PROSPECT?
Launched in April 2015, Miton UK MicroCap’s NAV swiftly rose from 49p to 71.6p in June 2018. From mid-2018 onwards, as mainstream stock markets became more unsettled, the NAV fell back. Overlaying this has been anxiety over Brexit, which led to even greater recent weakness among micro cap share prices.
Nevertheless, Williams and Turner remain excited about the trust’s prospects, arguing that ‘during the period of Brexit uncertainty the valuation of the UK stock market has fallen behind others. Quoted micro caps have been even more likely to be overlooked than mainstream stocks, so we believe that they have potential for an even greater performance catch-up to come.’
‘Micro caps are small compared to the large caps and so some can sustain good growth even when the wider economy is not growing. During globalisation and the years of plentiful growth, this differential has not been particularly relevant. However, now that globalisation has evolved into nationalism and global growth has moderated, micro caps could be important.’
OH NO NANOCO
Cadmium-free quantum dots maker Nanoco (NANO) proved the most disappointing holding in the half, the share price cratering after the company reported that its largest prospective customer would not be utilising its new factory capacity, despite having paid for the all the new machinery.
Nanoco was subsequently sold on the grounds it is unlikely to generate ‘any significant cash in the next few years’.
And whilst the prospective cash flows from Corero Network Security (CNS:AIM), Frontier IP (FIPP:AIM), Anglo African Oil & Gas (AAOG:AIM), Zotefoams (ZTF) and Trackwise Designs (TWD:AIM) were ‘slightly deferred’, Williams and Turner still expect them to become ‘substantial before long’.
They believe their share prices ‘will appreciate considerably when the cash generation potential comes through.’