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Gervais Williams: Investors have given up on UK micro caps

20 August 2019

Despite the pessimism towards the lower end of the market, the Miton manager says it could be one of the biggest beneficiaries once sentiment swings back in favour of the UK.

By Anthony Luzio,

Editor, FE Trustnet Magazine

Investors have largely given up on UK micro caps, according to Gervais Williams of the LF Miton UK Smaller Companies fund – yet far from making him pessimistic on the asset class, the manager said this could make it one of the best performing areas of the market if the post-Brexit fallout is not as bad as first feared.

The FTSE All Share collapsed along with most other global markets in the final quarter of 2018, but has more or less recovered to its starting point since then.

However, the rebound did not take place evenly across the board, with Williams pointing out that while the median return of FTSE companies in the £500m to £2bn bracket stood at 27.96 per cent from 24 December 2018 to 10 July 2019, this fell to gains of 14.17 per cent in the £100m to £500m bracket, and a loss of 4.92 per cent for companies with a market cap of less than £100m.

“Small caps haven’t done very well this year,” said the manager. “That’s not a great story for us. I think investor attitudes have got to a stage where there’s a lot of caution out there for obvious reasons.

“But I think there’s a danger that we are throwing the baby out with the bathwater. In other words, just because they’re not mainstream companies with international earnings, there’s been negative momentum. In terms of share prices, people have just been a bit cautious about stepping it up.

“So, we’re at a really critical point where people have lost hope, they have given up. But they have lost hope at the bottom of the market. We haven’t and not all of our clients have, thank goodness.”


While micro caps are particularly out of favour at the moment, there has been a lack of interest in UK stocks across the market cap scale since the vote to leave the EU three years ago, with multiple surveys showing exposure among international investors is at or close to historic lows.

Williams said the impact of this is most apparent in the forward free cash flow yield spreads of UK stocks versus their US counterparts. While these broadly moved in line with each other prior to the referendum, the figure for the S&P 500 has fallen since then as the index has rallied, suggesting it is more expensive, while it has risen for the FTSE 100 as it has become ever cheaper.

However, the manager said that when this gap does begin to close – and it could close faster than expected once there is greater clarity on the direction of the UK post-Brexit – it is likely to be accompanied by a rush to buy sterling, pushing its value up.

“So, when they [international investors] want to buy UK assets, they will say, ‘hang on a minute, I don’t want to buy the FTSE, because it is 75 or 80 per cent overseas earnings, what I need to buy is assets with more domestic exposure’.

“Now, that does include some FTSE 250 stocks. But of course, the area which we’re excited about is the many smaller quoted companies with domestic earnings as well. We think that will be the best performing part of the market.”

Conversely, Williams said that even a disorderly Brexit would not necessarily be a disaster for micro caps, pointing out that were sterling to plummet, the number of takeovers by foreign companies would surge because the market would be “so bloody cheap”.

LF Miton UK Smaller Companies has underperformed recently, falling almost 30 percentage points from its 2018 peak. Aside from its high exposure to micro caps, Williams also attributed this to the fact he is one of the few managers operating with a value strategy in this part of the market. Despite the poor performance, his preference for profitable companies with robust balance sheets means he is confident most of his holdings can weather any near-term storms.

“You see clients get worried saying, ‘what if there’s a downturn, don’t small companies get stuffed more than big companies?’ So there’s a real worry about companies going bust.

“You must be joking,” he said. “These are net cash, right? They could go bust, but they’re going to have to work at it.”

Williams is also relatively unconcerned about problems with liquidity, saying that while there have been redemptions following the panic surrounding the LF Woodford Equity Income fund, there are numerous checks and balances in place to prevent it becoming an issue.

He added: “We like to think that people who wanted to come out have come out and if anything, we’d like to think that we are more stable now.”


This is not to say he is not taking potential headwinds seriously. One of the manager’s favourite sayings when things are getting bad is, ‘don’t worry, they can always get worse’, and he said it is important not to confuse “the bottom of the page with the bottom of the market”.

“Let’s exaggerate, say that Boris Johnson misjudges, Jeremy Corbyn is in charge and he brings in some radical stuff.

"One of his things he’s looking to do to all quoted companies is they will have to give 1 per cent of their equity for the first 10 years of a Labour government to a special fund which will give 50 quid to each of their staff, and all the other dividends and things they will keep for the government.

“Clearly, Rio [Tinto] will just say ‘unlucky guys, we’re a US quoted company now’, between now and then. My goodness that will cause a ruckus. Don’t get me wrong, I’m not saying it’s going to happen. But you can always find ways of making things even worse.”

Data from FE Analytics shows LF Miton UK Smaller Companies has made 90.64 per cent since its launch in December 2012, compared with gains of 105.29 per cent from its IA UK Smaller Companies sector.

Performance of fund vs sector since launch

Source: FE Analytics

It is £106m in size and has ongoing charges of 0.86 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.