Why small-caps can continue outperforming and latest buys

TL;DR

UK market performance remains uncertain for the rest of 2021, but small-cap companies have the potential to continue outperforming. Liquidity and volatility are factors to consider in smaller company investments.

Transcript

hello today i'm joined by george enzo who is the full manager of the river and mercantile uk microcap investment trust since last november it's been a strong period of performance for uk shares where do you see the uk market going for the rest of 2021 and is there a danger that some smaller company shares have seen their share prices move too far a... Read More

Key Insights

• 🙈 Small-cap stocks have seen significant growth after starting from a depressed level.
• 🍉 Active fund management and historical data suggest that smaller companies can outperform over the long term.
• 👲 Global investors are recognizing the value in UK companies, resulting in increased private acquisitions in the small-cap and mid-cap sectors.
• 👨‍💼 The River and Mercantile UK Microcap Investment Trust has been actively managing its portfolio, returning capital and acquiring stocks through IPOs and traditional lending businesses.
• ✳️ Investing in smaller companies can be higher risk due to illiquidity, but other factors like operational gearing, earnings quality, leverage, and duration risk should also be considered.
• ✋ The trust does not benefit from inheritance tax relief, and the removal of the relief could create buying opportunities in high-quality businesses.

Questions & Answers

Q: Will small-cap companies continue to outperform in the UK market?

While their recent performance has been strong, it is difficult to predict short-term outperformance. However, the long-term data and value for money from active fund management suggest that small-cap companies can continue to outperform.

Q: What recent portfolio activity has occurred in the River and Mercantile UK Microcap Investment Trust?

The trust has returned capital and sold stocks, including successful recovery investments like DX Group. It has also had bids in the portfolio resulting in acquisitions of companies like Canberra, Cambria Automobiles, Sigma Capital, and AFH Financial. The trust has also been active in the IPO market.

Q: Is investing in smaller companies riskier than investing in larger companies?

Investing in smaller companies can be higher risk due to illiquidity. However, the illiquidity can also present opportunities for those who can exploit it. Other risks to consider include operational gearing, earnings quality, financial leverage, accounting quality, and duration risk.

Q: How would the removal of inheritance tax relief impact the River and Mercantile UK Microcap Investment Trust?

The trust does not benefit from inheritance tax relief, so its valuation of stocks would not be affected. Stocks that qualify for inheritance tax relief tend to be too expensive for the trust's investment process. However, the removal of the relief could lead to capital outflows from the AIM market, creating buying opportunities.

Summary & Key Takeaways

• Small-cap stocks have performed well in the past nine months, starting from a depressed level and catching up in value. Active fund management and historical data suggest that smaller companies can outperform over the long term.

• Global investors are recognizing the value in UK companies, leading to increased private acquisitions. Many of these acquisitions are happening in the small-cap and mid-cap sectors.

• The River and Mercantile UK Microcap Investment Trust has been selling stocks and returning capital as the trust grows in size. Recent buys include IPOs and a traditional lending business called DF Capital.