River and Mercantile UK Micro Cap announced its annual report for the year ended 30 September 2023. NAV total return for the period was  3.81%, compared to 3.27% for the the Numis Smaller Companies plus Alternative Investment Market index. Shares fell 4% with the discount widening to around 14%.

Given the broader sell off in small and mid-sized companies, NAV growth for the company is certainly a positive, with fund manager George Ensor commenting;

“I think most people agree that there is a mismatch between valuation and fundamentals for UK small caps. Clients and potential clients are either already invested or are waiting for ‘that’ catalyst. A study from JP Morgan showed the impact of timing the market using market returns for the 20 years to the end of 2019. The annualised return of 6.1% was reduced – by almost two thirds – to an annualised return of just 2.4% by missing out on the best 10 days. Realised returns were zero if one missed the best 20 days. The point is a simple one – the odds today appear stacked in our favour to make excellent returns over the next five years. There might be a catalyst, but it won’t be clear that ‘it’ is the catalyst until after the event. The opportunity may get better – if it does, we will continue to rotate the portfolio from less cyclical Quality investments into either more cyclical companies or Recovery investments.

The mismatch between valuations and fundamentals – which is evident in our current discount to NAV – has been driven by outflows from open ended funds and a market wide aversion to illiquidity. UK Small Cap funds have seen outflows every month since September 2021 and UK Smaller Companies (as measured by our Comparative Index) have underperformed the wider market by 37% since September 2021. We cannot see a previous period of outflows that extends longer than the current one and the last time there was a similar level of relative underperformance was in 1989-1991 (-39%). UK smaller companies are unloved and undervalued, in both absolute terms and relative to the wider market, on extremely attractive, once-in-a-cycle levels. We cannot call the bottom but putting capital to work today on a three to five-year view should be very rewarding.

RMMC : River and Mercantile optimistic despite volatility