River and Mercantile UK Micro Cap (RMMC) aims to achieve long-term capital growth from investment in a diversified portfolio of UK micro-cap companies, typically comprising companies with a market cap of less than £100 million at the time of purchase.
The company launched in December of 2014, and now has George Ensor at the helm who took over the portfolio from Philip Rodrigs in 2018. The team utilise an active, bottom-up strategy looking to add real value in the micro-cap end of the market via in-depth analysis where coverage is sparse. Like all managers at River & Mercantile, George follows the group’s PVT (Potential, Valuation, Timing) investment approach.
As of the end of March 2019 the portfolio is relatively concentrated, with only 43 holdings, but the managers believe it boasts a well-diversified array of companies. Not only is the portfolio evenly split among the small to micro market cap spectrum, the companies are fairly evenly split among the sectors. Only financials has a weighting greater than 20%, and the largest sector overweights come from oil and gas (+8.2%) and health care (+6.2%). At the other end of the spectrum, the portfolio has very little exposure to consumer services and consumer goods (-11.3% and -6.4% relative to the benchmark, respectively).
Since launch the trust has delivered NAV returns of 96.2%, compared to 40% for the Numis SC Plus AIM ex Invt Cos Index, 60% for the AIC peer group and 60.4% for the IA peer group. As such, the long-term track record is strong. However, the last quarter of 2018 hit the portfolio particularly hard and saw the company fall 21.7% in NAV terms.
As with most UK focused trusts, the past few years have seen the discount widen dramatically – although in this case, exacerbated by the change in manager in early 2018. Over the past two years the trust has reached a premium of close to 17%, and a discount of close to 15%. Currently the trust is trading at a discount of around 14%, considerably wider than the sector average.
Since the launch of the trust in 2014, RMMC has performed strongly, outperforming peers and the benchmark alike. However, since the change in lead manager times have been tougher, mostly due to factors outside the company’s control, but partly due to poor stock selection.
We like the fact that the manager takes a punchy approach, yet keeps risk down through diversifying among growth opportunities. This has been reflected in the trust’s beta of just 0.58 and the fourth lowest standard deviation in the 20 strong UK Smaller Companies investment trust sector (since George took over the portfolio).
Having gone from trading on a very hefty premium only a year and a half ago, the trust is now trading a discount of close to 15%, offering a clear opportunity for investors. Should we see some of the pessimism surrounding the UK subside, and George continue running the trust in a similar fashion to Philip, there is little reason for the discount not to narrow.
|Strong performance since inception
||New manager has yet to outperform the benchmark and peers
|Extremely wide discount relative to peers and history
||Pessimism continues to surround the UK
|Specialist mandate that suits the investment trust structure
||Relatively expensive OCF