This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of stock market investments will fluctuate and investors may not get back the original amount invested. To assist, where appropriate, a glossary explaining some of the terms used has been provided at the end of this update.
Key points:
- Focus on providing capital growth over the long term, at least 5 years
- Managed by highly experienced UK equity team since 2015
- Invests in the smallest companies listed on the UK stock exchange
- A diversified portfolio of 139 holdings (as at 31 August 2022), diversified by industry sector
Why we believe small is better
The primary focus of MINI is to provide shareholders with capital growth over the long term by investing primarily in the smallest companies at the time of investment (by market capitalisation), referred to as ‘micro-caps’ that are quoted (those listed on the stock exchange) in the UK.
Our approach when selecting the types of companies in which to invest to achieve this objective, has been to look to capitalise on the anticipated reversal of many of the dominant economic trends of the past three decades, in particular globalisation.
In recent years, institutional interest in quoted UK microcaps has waned in favour of other assets such as US technology, megacap (the largest companies measured by market capitalisation), growth companies. The uncertainties of Brexit also suppressed investor enthusiasm for UK companies, and as a result, many microcap companies are still looking undervalued, in our view. We expect the focus on ‘bigness’ during globalisation will evolve to include a renewed interest in smallness and we have positioned the trust to take advantage of this.
Why we like the unloved
When we are looking at companies to add to the trust, our focus is on those quoted micro-cap companies that we believe have been generally overlooked by the market. When these types of company succeed, their share prices can rise by greater percentages than larger companies. We look to avoid those companies that appear to be overvalued and also avoid those with high levels of gearing, which is the level of a company’s debt in relation to its capital. Instead, we prefer companies that we believe have clear growth potential, the ability to generate plentiful cash, and whose share prices have the potential to rise substantially if things go well.
Avoiding the fashionable
The primary drivers of MINI’s returns are specific companies within the portfolio. When selecting companies to add to the portfolio, we want to identify those with robust balance sheets, and that we believe are positioned to weather any stock market setbacks.
We have not invested in some of the most fashionable companies whose share prices may have risen substantially. This has helped the portfolio to avoid instances where a microcap company runs out of cash, leading them to issue new shares at lower levels and diluting shareholders (decreasing the value of their existing ownership percentage).
Another key performance driver is our investment in companies whose share price movements behave differently to the rest of the portfolio, such as gold mining companies, the prices of which often rise when stock markets are falling, cushioning the portfolio in adverse conditions.
Looking ahead
We believe the trust is well positioned for the future as its portfolio is largely composed of companies which can generate profits, have robust balance sheets and that also have evidence of delivering outstanding customer service which in our view puts such companies in a really good position to generate better profit margins than other companies who are less aware of the needs of front-line staff. There is no guarantee that the investment objective of the trust will be achieved.
We consider Environmental, Social and Governance (‘ESG’) issues as they are helpful in seeking to reduce risk in our investment portfolios. In particular, when we meet UK quoted smaller companies we believe that addressing the climate change agenda ahead of the market can lead to commercial advantage in a similar way to prioritising premium service and socially useful outcomes often helps retain staff in a competitive market. We believe that company management that focus on both profitable financial results as well as reducing commercial risks via ESG initiatives are better investments and therefore lead to better financial outcomes for investors in the trust.
In short
So, whilst many of the companies in which we invest are relatively tiny in comparison to the largest quoted companies, these can be significant businesses in their market place and therefore have the potential to generate significant surplus cash should they succeed and attractive returns for the trust.
