Montanaro European Smaller Companies (MTE )

Performance

The £302m portfolio run by George Cooke and Stefan Fischerfeier reported a net asset value (NAV) increase of 13.1% in the six months to end of September, broadly in line with the 13.2% from the MSCI Europe Small-Cap ex UK benchmark. The shares rose 13.5%, resulting in a total return of 14.1% and reducing the discount from 8.3% to 8% over the period.

Montanaro’s style of investing in high-quality, growing companies has faced headwinds. ‘Quality has lagged the broader European market by more than 5%, as investors favoured lower-quality, more cyclical names,’ said chair Richard Curling, who retires at the end of the year.

‘Despite this backdrop, the board believes stock selection – adjusted for these style swings – remains positive which is the key determinant of long-term future success.’

Corporate action

Over the period, the trust bought back 30.8m shares which helped it maintain a single-figure discount. It also introduced twice yearly tender offers to give shareholders an exit opportunity and enhance liquidity. Shares will be repurchased at a 5% discount to NAV, with each offer capped at 5% of total shares to protect ongoing shareholders.

Outlook

Curling said the valuation of European small-caps is cheap relative to history and the wider European market despite the sector modestly outperforming large-caps in the past two years.

However, it was too early to call a ‘turning point’ for the sector, and it was ‘impossible to say with precision’ when the trust’s style headwinds would abate.

‘We note that growth companies have now recorded their longest and deepest period of underperformance relative to value since before the global financial crisis, while quality has seen similarly historic drawdowns both in Europe and wider global markets,’ said Curling.

‘It is of course when assets are most out of favour that they can represent the best long term investment opportunities.’

CQS Natural Resources Growth & Income (CYN )

Performance

The £117m portfolio of natural resources and commodity equities delivered a NAV total return of 4.6% and the share price total return topped 9.3%. Although the trust does not have a formal benchmark, it stayed well ahead of the 4.5% decline in the MSCI World Metal & Mining index and a 7.7% fall in the MSCI World Energy index.

The return was achieved despite a headwind of sterling strength, as the pound rose nearly 9% against the US dollar over the period.

The outperformance was led by large precious metals exposure alongside a bounce back in uranium miners following a bout of weakness. On the flip side, industrial base metals, iron ore and oil prices were weak.

After the encouraging performance over the year, we believe the portfolio’s fundamental positioning can sustain further momentum. Indeed, at the time of writing, since the financial year end, the Company has achieved a 49.2% NAV total return while sterling adjusted returns for the MSCI World Metals and Mining and MSCI World Energy indices stand at 31.5% and 6.2% respectively.

Portfolio activity

Precious metals may have contributed to returns but the performance of individual stocks has been ‘disjointed’ and provided an attractive opportunity, said manager Ian Francis, who runs the portfolio with Keith Watson and Robert Crayfourd.

The trio rebuilt a position in derated gold producer Emerald Resources after taking profits in 2024, however, the holdings in peers Ora Banda and Greatland Gold were reduced.

‘Proceeds from such sales were reinvested, with positions taken in developer, Polymetals, which will produce significant quantities of silver from its mine restart, and explorers, Goliath Minerals and Southern Cross Gold, which both appear to be well positioned to delineate large-scale, high grade gold resources in Canda and Australia

Corporate action

Over the year, the trust expunged US activist Saba Capital from its share register, firstly with a shareholder vote against its requisition and then via a tender that gave the New York-based group to exit its stake.

Outlook

Global economic growth remains ‘elusive’ and underlying activity is ‘potentially flattered by inventory building’ as an attempt to smooth out tariff impacts.

‘With little to suggest an end is in sight for fractious international trade, which is acting as a considerable drag to economies, the sustainability of growing government indebtedness has moved rapidly into focus. In such an environment a high weighting to precious metals equities continues to appear appropriate, particularly as they have yet to fully appreciate the move up in underlying metal prices and they remain near historically low valuations,’ said Francis.

BlackRock Smaller Companies (BRSC )

Performance

The £658m UK small-cap portfolio fell short of its Deutsche Numis Smaller Companies plus AIM index over the six months to end of August, with a NAV total return of 2.9% versus a 9.9% move higher in the benchmark.

The trust has slipped behind as its growth investing style remains out of favour, as does smaller companies investing with performance dominated by a narrow range of stocks.

Roland Arnold, manager of the trust, said the UK small-cap sector is suffering a ‘crisis of confidence’ with negative sentiment and corporate delays on investment decision heaping pressure on valuations.

Stock-specific disappointments were ‘limited’ but the exposure to property, construction, leisure and food companies has been ‘damaging’.

‘These sectors have all been impacted by fears over the potential impact of the forthcoming budget on consumer confidence, employment and costs,’ he said.

Portfolio activity

Turnover in the portfolio has been elevated over the year, with Rosebank Industries added on the back of an equity placing for over £1bn to fund the acquisition of Electrical Components International. Low property sector valuations have reached attractive levels, with both Shaftesbury and Safestore added.

The positions in Gamma Communications and Coats were exited.

Outlook

Arnold said geopolitics is ‘unstable’ with structural and technological trends ‘upending industries and western governments’ which are also suffering the weight of huge debt burdens. In the UK, the budget has increased pressure on business and injected inflationary pressures, resulting in outlooks across UK equities.

‘The UK market trades at a discount to international peers, and UK smaller companies trade at a discount to their larger cap cousins and relative to their own past,’ he said.

‘History doesn’t repeat itself, but it often rhymes, and at some point I believe we will hear something that sounds distinctly like 2003 or 2009, both years where for no apparent reason the renaissance of the small-cap markets began.’

JPEL Private Equity (JPEL )

Performance

The £29m portfolio which has been in managed wind down since 2016, reported a decline in NAV of 4.96% in the year to end of June, and down 5.5% from the end of March.

The fall was due to a mark-to-market adjustment in the Private Equity Access fund, Strategic Value Global Opportunities fund, and Blue River Capital.

Portfolio update

The fund retains a right to sell the Tax Advisory Services Company, which makes up 44% of NAV, after tax legislation was passed in the US that will have a positive impact. The rule changes allow R&D expenditures to be fully expensed in the year they are incurred and includes a provision to allow businesses with average annual receipts under $31m to retroactively apply the change.

JPEL believes the legislation will provide valuation upside and has therefore not exercised its option to sell.

Wind down

The board believes the best option in the near term is to run off the portfolio organically, and it is exploring ways to maximise shareholder value over the next two-and-a-half to three years.

What the analysts say

JPMorgan Cazenove’s Christopher Brown said it makes sense to negotiate a new price for the Tax Advisory Services Company and ‘at the same time sell the remaining fund interests at a discount to get the maximum cash back to shareholders as soon as possible’.

‘If that could be achieved within the next six months, the return to shareholders could be very attractive,’ he said.

‘While JPEL will be too small for most new investors, those who are already invested should ultimately earn a good return from the current price.’

Abrdn Diversified Income & Growth (ADIG )

Capital return

The £176m multi-asset trust has confirmed it will return £57.2m – or 15% of share capital to investors in a B-share scheme. The scheme is the ‘fairest and most efficient way of returning substantial amounts of cash to shareholders’ as part of its wind down. To date, the company has retuned £115m to investors.

Asset sales

As part of its wind down, the trust is selling off its private market assets in a secondary sales process. It has now completed the sale and transfer of two fund interest, and 50% of another interest.

The stake in the funds were sold for £21m which is 11.5% of the total NAV. The remaining interests total £94.5m, of which £27.9m are subject to conditional sale and purchase agreements, and £66.7m of which are subject to binding sales agreements and are under offer.

ADIG has cash of £79.6m, of which £57.2m is earmarked for a November return of capital.