Veteran stock picker Charles Montanaro (pictured) has committed to another five years managing the Montanaro UK Smaller Companies (MTU ) investment trust and signalled a similar commitment to his open-ended funds.
The 65-year old founder of Montanaro Asset Management, who delighted investors at a Citywire virtual event in February, renewed his pledge to stay at the helm in annual results for the £264m trust published today.
This will reassure investors in the trust given Montanaro salvaged its long-term performance record, stepping back as lead manager in 2016 after it trailed rivals for a decade.
The asset management group said George Cooke would take over from Montanaro as manager of the Global Select fund at the end of this month, with Andrea Shen continuing to work on the £17.4m mandate. But otherwise Citywire AA-rated Montanaro plans to continue as previously.
A Montanaro spokesperson said: ‘Charles aims to emulate Warren Buffett and may never retire.
‘There are no plans for Charles to change any of his other responsibilities currently and he remains co-manager of the Better World fund and UK Income fund and will be for at least another three years.’
In both cases, a separate lead manager is named. Citywire A-rated Mark Rogers heads up Better World with an impact investing goal and Guido Dacie-Lombardo runs the UK income strategy, which is the slightly larger of the two with about £800m of assets across funds for retail and institutional investors.
Annual results for the trust showed Montanaro’s ‘quality’ stock-picking style struggled in the vaccine-driven rotation, although it made progress in closing the long-running discount - or gap - between the share price and underlying net asset value.
In the 12 months to 31 March NAV grew 35.8% with dividends included versus the impressive 65.6% total return for the Numis Smaller Companies index excluding investment companies. Shareholders, however, enjoyed a 50% return due to a re-rating of the shares and a narrowing in their discount.
That sharp underperformance follows a year when the trust outperformed its benchmark by more than 17%. As a result, when considering the performance over the last two financial years, MTU outperformed by around 2% on an NAV basis and by around 27% in share price terms.
Chair Arthur Copple, who also chairs Temple Bar (TMPL ) investment trust, said the board was ‘delighted’ by Montanaro’s extending his commitment to MTU.
Copple wrote: ‘Since returning as named manager in 2016, Charles has managed to outperform the benchmark by 8% in terms of NAV and by 55% in share price terms despite the recent value rally. He is also a major shareholder in [MTU] which, when combined with the holding of Montanaro Asset Management, means that it is his largest personal listed investment.’
At the forthcoming five-yearly continuation vote at the next annual general meeting, the board recommends shareholders vote to continue MTU for a further five years.
The largest contributors for the trust over the year included Treatt (TET), the manufacturer of fragances and flavourings, which saw its share price rise more than 140% as it moved into higher value-added products. It moved from a 2% position to a 3.6% position at the end of the year.
Northern Irish software group Kainos (KNOS) was another bright spot, up 127%, driven by strong demand for digitisation projects both from government and corporates. The company has also moved up in MTU’s portfolio, from a 1.2% position a year prior to a 3.7% position at the end of March, making it the third biggest holding.
Marshalls (MSLH), the UK’s leading hard landscaping business and a large off-benchmark position, rose 17%, making a negative relative contribution. Cranswick (CWK) shares slipped 2% despite evidence of solid trading, according to the results, having been one of the portfolio’s best performers in the first quarter of 2020.
In his review of the year, Montanaro said that Monday 9 November – when Pfizer and BioNTech announced the first effective Covid-19 vaccine – had been ‘a great day for humanity but also for investors in those businesses which had suffered most from the economic consequences of Covid-19’.
That has created a tough environment for his style in the last six months, which emphasises profitable companies with low debt and generally avoids cyclical areas such as high street retail and miners which have led the recovery.
Montanaro said there were signs the rotation could be losing steam, pointing to a recent survey published by Bank of America indicating that, by mid-March, most fund managers were heavily overweight in cyclicals and commodities with the largest underweight in technology since the start of the bull barket in 2009.
‘In a recent letter to investors, we urged our clients to remain calm in the face of the market rotation that has occurred. This is a message that we reiterate here,’ he said.
Over the five years to 15 June, shareholders in the trust have enjoyed a 114% total return while the NAV has advanced 73%, versus the 67% gain for the benchmark.
The Montanaro UK Income fund has returned 62% over the past five years versus the 45% average in the Investment Association UK All Companies sector which is uses as a comparison.
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