A quick note today, on micro-cap (and small cap) investment trusts. This is a space I think is perfectly suited to closed-end fund investing, not least because it favours stock pickers who are willing to engage in properly active strategies. Traditionally the choice for micro-cap funds has been fairly limited, although there’s always been a larger pool of small-cap funds available. The good news is that in the last few years we’ve seen an explosion of new funds, most of them listed in the table below.
The even better news is that overall performance over the last 12 months has been impressive but hugely VARIED. I emphasized this last feature because that is precisely what we’d expect. If you are investing in an obviously volatile asset class, with varying correlations both between micro-cap indices and wider markets AND between micro-cap stocks themselves, you’d expect to see wildly varying returns – especially this late in the bull cycle.
What is perhaps more surprising is the degree of underperformance by some of the funds. I think the Downing fund, for instance, is an excellent choice, with a proven manager but recent performance has been more than a little uninspiring. Miton Micro Cap – another excellent manager with a great reputation – has also had a tough year and is “only” up 16% in share terms over the last 12 months. The Athelney trust, a long established bell weather for the micro-cap space, has also had a rather pedestrian 12 months, up 17% although it is up a rather more impressive 8% over the last month. All three of these funds have underperformed a reference benchmark such as the Numis Smaller Cos index.
The stand out star has been River and Mercantile which is probably my favourite fund in this space. It’s turned in a 4% return over the last month but is up a cracking 55% over the last year. No wonder the fund is having to redeem shares yet again – it has a hard limit of £100m and has already handed money back to shareholders in the summer. According to Numis this second compulsory redemption of shares will amount to c.£15m. The redemption price is 191.24p with proceeds expected by 15 December. The redemption represents c.13.1% of assets. So, another set of cheques should land just before Xmas. This is an impressive show of intent – the fund really does want to stay at what it thinks is the right size.
Rather less impressive are the bid-offer spreads. I’ve detailed these in the table below. Spreads of more than 2% are frankly unacceptable and River and Mercantile is currently trading at a 4% spread – although that number is topped by Athelney which is at 8%. The funds’ brokers need to do much, much more to close this gap and encourage increased supply.
One last comment. Looking at the broader global small-cap space, the stand out performer is another one of my favourites – Edinburgh Worldwide, a stock which I hold in my SIPP. This is up 45% over the last 12 months. By contrast ScotGem, a new global EM small-cap fund has had a disappointing start with a loss of 2.5% over the last 3 months. As a side note, its bid offer spread is a whopping 5%.
|Fund||Bid offer spread||1 mth||3 mth||6 mth||1 year|
|Reference benchmark – Numis Smaller Companies Index||NR||-0.8||2.7||3.2||21.1|
|Downing Strategic Micro Cap||2.4%||-1.5||-4.9||-9.5||NA|
|Miton Micro Cap||2.9%||-3.1||-0.6||-1.4||16.1|
|River and Mercantile||4.1%||0.8||4.9||13.2||55.9|
|Global Smaller Cap|