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Five More Years: Montanaro commits to stay on as UK small cap trust manager

25 June 2020

Charles Montanaro commits to another half-decade righting the performance of Montanaro UK Smaller Companies investment trust.

Veteran fund manager Charles Montanaro has committed to managing Montanaro UK Smaller Companies (MTU ) for at least another five years after delivering a third successive year of outperformance at the £179m investment trust.

The trust’s twenty-fifth set of annual results, covering the year to 31 March, detailed how MTU protected its investors from the worst ravages of the coronavirus crash. An 8.5% net asset value (NAV) total return including dividends represented a 17.4% outperformance of its benchmark, the Numis Smaller Companies Index excluding investment companies, which crashed 25.9%.

Relatively speaking, that continues the turnaround since Montanaro, who heads up the firm of the same name he founded in 1991, was forced to step in personally three years ago after MTU had serially underperformed rival UK small-cap trusts for a decade.   

Chairman Arthur Copple said he was ‘delighted’ Montanaro had committed to steering the trust, which has its next continuation vote in 2022, for another half-decade.

While the pandemic has not derailed the comeback for the portfolio itself, MTU’s shares have drifted back towards the wide 20% discount to net asset value (NAV) that plagued the trust previously.

Copple, who also chairs struggling UK equity income trust Temple Bar (TMPL ), outlined how the discount had narrowed from 18% to 11% over the year. However, with sentiment still weak on British smaller companies in an unprecedented trading environment and poor prospects for the UK’s ongoing trade negotiations with the EU, the discount has since widened to 17%, according to the Association of Investment Companies (AIC). The average discount in the UK Smaller Companies sector is just under 9%.  

The board did not buy back any shares in the year – a typical tool when supply outstrips demand for an investment trust’s shares – and has not done so for at least three years.

The trust reaffirmed the more generous dividend policy put in place in July 2018 of paying out 1% of net assets each quarter, with the aim of sparking more demand for its shares. While this has driven it up to a 5% yield, joint third-highest in the sector, according to AIC data, it has yet to result in a sustained rerating.

With the results showing dividends of 5.3p per share outstripping investment income of 2.7p per share already, and dividends now in freefall across the UK market, investors could also be concerned the policy will crystallise losses as MTU has to sell shares at a low in order to support its payout.  

AIM high

The manager highlighted the resilience of companies favoured by its ‘quality growth’ investment approach. While he did not comment on any recent trading, the results suggest positioning is little changed since the start of the year, with the trust benefiting relatively from having no exposure to the struggling oil and gas sector compared to 4.1% in the benchmark.

A smaller weighting in the April factsheet indicates MTU may have taken some profits on Hilton Food Group, its top holding at the end of March, with shares in the food packaging business up more than 10% this year. Another large position, concrete specialist Marshalls, has been weak in this environment, with its shares down by over a quarter in 2020.

Holdings of companies listed on the Alternative Investment Market (AIM) continue to grow, to 34% of the portfolio by value, up from 25% last year, after a review in 2017 showed shunning the junior stock exchange had held back performance.  

Montanaro, who is supported on the trust by George Cooke, manager of the top performing Montanaro European Smaller Companies (MTE ) trust, emphasised the increasing marketing efforts made by his firm to attract private investors. 

‘We have invested a great deal of time to make [MTU] readily available to all investors. We have continued to grow our presence across the UK’s investment platforms and are delighted to see a steady increase, year after year, in [MTU]’s retail following.’

Data in the results indicated MTU’s top 12 shareholders, accounting for nearly two thirds of the register, are either asset managers or pension funds.

The manager, who also works on the Montanaro UK Income and Better World funds, highlighted the trust’s high levels of cash as readying it to take advantage of cheap opportunities and offering protection from some of the market falls. At the end of March, the trust had just over £12m of cash in the bank, compared to net assets of £190m, according to the results.

Over three years, the trust’s shareholders have enjoyed an 8% total return compared to 11% losses for the benchmark.

Over 10 years up to yesterday MTU ranks 12th out of 24 trusts in the AIC UK Smaller Companies sector with a total shareholder return of 182.4%.

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