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Ensor: don’t miss my ‘double discount’ on UK micro-caps

24 March 2020

George Ensor, manager of River & Mercantile UK Micro Cap, says depressed micro-cap valuations and a widening discount make his trust a bargain.

Fund manager George Ensor claims his investors will benefit from a ‘double discount’ on the River & Mercantile UK Micro Cap (RMMC) investment trust as he predicts ‘50% upside’ for smaller companies amid the meltdown in global stocks.

Investors in the trust, which invests in some of the UK’s smallest quoted companies, have had a tough time of late. Like many rivals last year it struggled against Brexit pessimism about the economy and the downfall of Neil Woodford which highlighted the danger of getting stuck in the sort of small, illiquid stocks that Ensor likes to buy.

As a result net asset value (NAV) declined 17.5% against a 7.3% fall in the Numis Smaller Companies plus Alternative Investment Market index, its benchmark – which discouraged investors and depressed the share price.

And after the rout of the past month shares in the £63m trust, which former analyst Ensor took over two years ago after the sacking of Philip Rodrigs, trade at an 35% discount below NAV, double their 12-month average.

However, Ensor sees the widening of the discount as an opportunity. He recently increased his personal stake with the purchase of more shares and believes investors who get in now will benefit from not only depressed small-caps but an attractive trust share price, currently 138p versus 166p NAV per share.

‘UK consensus was pretty positive last year,’ said Ensor. ‘UK equities, compared to pretty much any other country looked very depressed.’

He added that on a 10-year basis, the valuation of companies with a market value under £500m now trade at such a low level as to intimate ‘a 50% upside’ to their current prices.

‘Small-cap equities are on a very attractive valuation, and the second element is that the investment trust has a near 20% discount, so you are getting a double discount on UK micro-cap equities,’ he said.

Tempting investors into what are perceived as more risky micro-caps is not an easy task in the current climate, even within the closed-end structure of an investment trust, which shields fund managers from having to sell holdings because investors pull out.

Ensor said the combination of the Covid-19 virus and the oil price war between Russia and Saudi Arabia were ‘exceptional’ events that left markets at ‘very very stressed levels’.

He warned that countries were still ‘not back in a position where they can deal with the crisis’, as the debt pile leftover from the financial crisis in 2008 was large and was set to rise as more governments cut interest rates, printed money and hiked spending.

Contrary to perception, Ensor said smaller companies were well positioned to deal with the disruption coronavirus was causing supply chains as more countries went into lockdown.

‘Small-caps have the benefit in that they have smaller supply chains, they are more likely to have onshore manufacturing, and so it is easier to understand how they may perform in times of uncertainty,’ said Ensor.

Ensor said the trust had benefited from its position in gold miners when gold soared to a seven-year high, although it too had been sold off in the recent panic.

Around 10% of the portfolio is invested in gold-related stocks, which Ensor added last year as he said the valuations looked too cheap and stocks were beginning to be uprated.

‘We have been running [gold and platinum stocks] for a year and that is paying dividends at the moment,’ he said.

He holds AIM-listed platinum producer Sylvania Platinum (SLP), and gold miners Shanta Gold (SHG) and Hummingbird Resources (HUM).

‘We also have a pick and shovels play in Capital Drilling (CAPD), which leases drilling equipment to gold miners in Africa,’ he said.

Ensor is not a thematic investor buying stocks that are part of a broader trend. Instead he screens for stocks that have a clear growth story, an attractive valuation and a specific catalyst for why the shares should do well. 

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