I’m a little disappointed to see that the two UK equity funds prepping their IPOs (Tellsons and Buffetology) have pulled the process. As I mentioned in a Citywire column on the subject, I wasn’t completely convinced that either made a compelling case for buying into a new fund at par when plenty of other existing funds in this space are trading at big discounts. That said these two proposed fund strategies would have undoubtedly enriched the UK listed funds segment and I had hoped that both would persevere, against the odds.

That wasn’t to be, so perhaps we should refocus our attention on the existing funds in this space.

Tomorrow I’ll be back with another funds idea but today I want to stick with the Q3 presentations released just today by Montanaro Asset Management. As I detail at the bottom of this blog, they have two well regarded small to mid cap funds, one for the UK, the other (arguably more successful) for Europe.

The presentations offer up a compelling narrative, contrasting the appeal of continental Europe small caps versus the precarious state of UK equities.

Let’s start with the UK small caps market.

As the first chart shows this has recovered some of its oomph but the Montanaro team are, I think correctly, cautious about the impact of the Covid second wave. I think we are in for a very nasty three months and I think there will be little respite for classic value stocks. The key is to stay focused on quality and growth stocks.

The good news is that overall, UK small cap equities are still compelling value despite the small recent bounce back, especially if we look at long term measures of value such as the CAPE measure.

The next two charts remind us that when the bounce back eventually comes – my guess is Jan or Feb next year – the returns could,be impressive, or at least if the past is any guide.

My sense is that Motanaro are probably in the right place when they suggest that subsequent annualised returns might be closer to 12% per annum.


The last two charts tell a very different story – European small cap renaissance. The recovery has been so strong that small caps in Europe are now trading close to all time high valuation levels based on the price to earnings ratio. 

The Montanaro gamely suggest that despite these high valuations, European small caps remain attractively priced versus their large cap brethren. Maybe, but I’m not quite so sure.

To finish, here’s a few key observations on the two Montanaro funds cribbed from those quarterly presentations.

MUSCIT: UK Smaller Companies Investment Trust

  • NAV down 13% since January 1st, up 17% since April 1st (in GBP)
  • Outperformance of 7% v. benchmark since the start of the calendar year
  • The second COVID wave could spell trouble for weak companies – stick to Quality
  • A solid portfolio – almost 40% of our companies have net cash
  • An attractive dividend policy at a time when dividends are being cut: 1% of NAV paid out each quarter
  • One of the highest yielding UK SmallCap Trusts (12m trailing yield of 4.8%)
  • Discount attractive at 15% – the end of the Brexit transition period could reignite interest in UK SmallCap

MESCT: European Smaller Companies Trust

  • NAV up over 23% since January 1st and 51% since April 1st (in GBP)
  • Outperformance of c.20% v. benchmark since the start of the calendar year
  • Top in peer group over 1, 3, 5 and 10 years
  • Discount has almost disappeared
  • The portfolio is in good shape: 39% of companies have net cash