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James Carthew: River and Mercantile's mighty 'micro cap' returns

James Carthew: River and Mercantile's mighty 'micro cap' returns

by James Carthew Feb 28, 2017 at 11:56


I thought this week I might revisit the two UK micro cap funds, River & Mercantile UK Micro Cap (RMMC) and Miton UK Microcap (MINI).

My interest was piqued by the impressive net asset value (NAV) return RMMC has delivered over the past six months, up by more than 25%, making it the best performing UK smaller companies fund.

MINI’s performance over the same period is 14%, putting it more towards the middle of the peer group. Longer term, RMMC’s outperformance of Mini is even more pronounced.

They have almost identical market caps – around the £105 million mark. RMMC has lower ongoing charges (1.36% vs 1.91%).

I had thought that, post the European Union referendum, the smallest small companies would be out of favour with investors and these two funds would struggle.

Generally, despite reasonable performance in recent months, the UK smaller companies sector is out of favour with investors and discounts are quite wide.

Both these funds are trading close to NAV, however: a small premium for RMMC (+1.8%) and a small discount (-0.4%) for MINI. Investors seem to be more willing to stick with the micro cap funds. This might be because they see them as valuable exposure in an area of the market that it is hard to cover properly.

The main difference between the two funds seems to me to be the degree of concentration within RMMC’s portfolio relative to MINI’s. At the end of 2016, RMMC’s top 10 holdings accounted for 41.8% of the fund while Mini’s top 10 accounted for 23.6%.

RMMC said at the outset that it wanted to keep the number of holdings in the portfolio in the 30 to 50 range, so as to maximise the benefit of good stock selection and had 45 holdings at the end of September 2016. By contrast, MINI had 127 holdings at the end of December as it aims to diversify away some stock specific risk.

It is hard to spot much of a crossover between the two portfolios; the occasional name crops up but that’s about it. This job is made noticeably harder because neither fund publishes its full list of investments, even in the annual reports (which, being at least a couple of months out of date, can’t be said to give away too much sensitive information). I have said before that I think investors deserve to know exactly what they are invested in.

Looking at RMMC in a bit more detail, it focuses on companies that it believes have a competitive edge over their peers. The managers believe there are far more of these to be found within their universe than further up the market cap scale. A lack of research and a general neglect of this area of the market creates mispricing that the managers can take advantage of.

Each quarter RMMC publishes the stocks that have had the biggest impact on returns. In the fourth quarter of 2016 RMMC’s net asset value rose by 10.3%. Eight stocks contributed 10.1% to the fund’s performance between them.

Top of the list was software company, Blue Prism (PRSMB). Blue Prism’s software allows IT systems to communicate in the same way that a human would access a computer, making integrating systems much easier than traditional methods. This was RMMC’s second largest holding at the end of the quarter and added 2.8% to the NAV (the stock delivered a 471% return over the course of 2016).

The largest holding at the end of December was Taptica (TAP), whose share price has been soaring, up 30% in the last month alone. Its software aims to optimise the delivery of mobile advertisements.

RMMC made a pledge when it launched not to grow its assets beyond £100 million in real terms. It topped up its original launch proceeds with a couple of issues in 2015, raising about £21 million.

Investment performance since then has taken the asset value up to the £100 million mark. The board have promised to start returning capital to shareholders once the fund starts to exceed this figure materially. This might even happen later this year, depending on how 2017 pans out.

James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice

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Comments  (5)

  • Stephen B.: 

    Generally for exposure to very small companies I prefer VCTs given the substantial tax advantages.

    16:55 on 03 March 2017

  • anglo29: 

    I seem to recall reading that investments in small companies (AIM 100 stocks?) are not subject to tax from either dividends or capital gains, also they do not count as part of an estate for inheritance tax purposes, even outside of a VCT. Anyone have the definitive answer on this?

    17:35 on 16 April 2017

  • Stephen B.: 

    I think AIM companies can now be held in ISAS in which case you don't pay CGT or income tax, and are also treated as business assets for IHT. However VCTs and EIS investments have upfront tax relief on top.

    23:16 on 16 April 2017

  • anglo29: 

    Thanks for that. Since posting this I've been shown an article in Saturday's Telegraph Money supplement indicating that individual AIM shares, even if held outside an ISA, qualify for a tax break re. IHT, providing they are held for at least two years. But just to complicate things, those that are REITS or are dual listed do not qualify. Neither do funds.

    As you state VCT's have tax relief on top, I believe that they must be held for a longer period, 3 years or 5, before qualifying for this.

    12:04 on 17 April 2017

  • Stephen B.: 

    Yes, the IHT advantage has been true for a long time, but the ability to put them in ISAs is new. And it's true that you have a 5-year holding period for VCTS, but I don't expect to trade funds often anyway. There's also the fact that AIM is something of a minefield unless you have a lot of experience, so it's an area where I'd rather pay a fund manager.

    01:21 on 18 April 2017

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