17 June 2024
MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC
2024 ANNUAL RESULTS ANNOUNCEMENT
AND
NOTICE OF ANNUAL GENERAL MEETING
Montanaro UK Smaller Companies Investment Trust PLC announces its annual results for the year ended 31 March 2024 and the publication of its annual report and accounts for the same period, which includes the notice of its 2024 annual general meeting.
HIGHLIGHTS
For the year ended 31 March 2024
Performance
| Total Returns | 1 year | 3 year | 5 year | 10 year | Since launch |
| Ordinary share price1 | 0.7% | (20.7%) | 18.6% | 40.2% | 843.4% |
| Net Asset Value (“NAV”) 1 | 8.3% | (9.6%) | 12.4% | 36.3% | 876.0% |
| Benchmark2 | 9.0% | (0.7%) | 21.8% | 56.2% | 555.5% |
| Capital Returns | 1 year | 3 year | 5 year | 10 year | Since launch |
| Ordinary share price1 | (3.8%) | (30.3%) | (4.7%) | (0.1%) | 431.6% |
| Net Asset Value (“NAV”) 1 | 3.9% | (19.9%) | (7.9%) | 1.1% | 495.8% |
| Benchmark2 | 5.0% | (9.7%) | 5.6% | 17.2% | 168.7% |
Sources: Deutsche Numis, Bloomberg, Association of Investment Companies (“AIC”), Montanaro Asset Management Limited (“MAM”)
| As at 31 March | 2024 | 2023 | % Change |
| Ordinary share price | 101.0p | 105.0p | (3.8) |
| NAV per Ordinary share1 | 118.9p | 114.5p | 3.9 |
| Discount to NAV1 | 15.1% | 8.3% | |
| Gross assets1 | £219.1m | £211.6m | 3.5 |
| Net assets | £199.1m | £191.6m | 3.9 |
| Market capitalisation | £169.1m | £175.7m | (3.8) |
| Net gearing employed1 | 2.7% | 4.8% |
| Year ended 31 March | 2024 | 2023 | % Change |
| Revenue return per Ordinary share | 3.2p | 2.3p | 39.1 |
| Dividends per Ordinary share | 4.6p | 4.5p | 2.2 |
| Ongoing charges1 | 0.9% | 0.9% | |
| Portfolio turnover1 | 23.4% | 22.2% |
¹ Details provided in Alternative Performance Measures on pages 62 to 63 of the Annual Report.
² The Benchmark is a composite index with the Deutsche Numis Smaller Companies Index (excluding investment companies) (“NSCI”) used since 1 April 2013.
HOW TO INVEST
The Board has dedicated a great deal of time to make MUSCIT readily available to all investors. MUSCIT has continued to grow its presence across the UK’s investment platforms. We are delighted to see a steady increase in MUSCIT’s retail following.
Together with Montanaro Asset Management, we have appointed Marten & Co to provide sponsored research. The latest report published in June 2023 is available here: https://quoteddata.com/research/montanaro-uk-smaller-companies-a-coiled-spring-qd/
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For further details about how to invest, please refer to the website: https://montanaro.co.uk/trust/montanaro-uksmaller-companies-investment-trust/
CHAIRMAN’S STATEMENT
I am pleased to present the twenty-ninth annual report of MUSCIT for the year ended 31 March 2024.
Results
In the year to 31 March 2024, the Net Asset Value (“NAV”) of MUSCIT returned 8.3% (with dividends reinvested). In comparison, our benchmark, the Deutsche Numis Smaller Companies (excluding investment companies) Index (the “NSCI”) gained 9.0%. During the same period, the share price of MUSCIT returned 0.7% (with dividends reinvested) as the discount widened from 8.3% to 15.1%. Compared with the NSCI including AIM, MUSCIT’s NAV outperformed by c5%.
Since its inception in 1995, the Company has delivered a cumulative NAV total return of 876%, significantly outperforming the composite benchmark which delivered a return of 555%.
Dividends
The Company’s investment objective has always been to generate capital growth. This remains unchanged. Dividends are now paid each quarter equivalent to 1% of the Company’s NAV on the last business day of the preceding financial quarter, being the end of March, June, September and December.
During the financial year, the Company paid four quarterly dividends amounting to a total of 4.60p, equivalent to 4.4% of the share price at the start of the year and 4.6% of the share price at the end of the period. MUSCIT remains one of the highest yielding UK small cap investment trusts.
The Company holds substantial reserves which are available for distribution in future.
Discount
In common with many other investment companies, over the the last financial year, the discount of MUSCIT’s share price to NAV, widened from 8.3% to 15.1%. The average discount for the year was 11.6%.
The Board and the Manager have worked hard to make MUSCIT attractive to private clients, including implementing a five-for-one share split in 2018; introducing the new dividend policy; reducing costs; and increasing the focus on marketing. These initiatives continue to bear fruit as more and more retail investors appear on the share register. This should help to reduce discount volatility in the shares of MUSCIT.
Gearing
The Board is responsible for setting the Company’s gearing strategy and approves the arrangement of any gearing facilities. Montanaro Asset Management, the Company’s Alternative Investment Fund Manager (the “AIFM”), is responsible for determining the net gearing level within the parameters set by the Board. The ability to issue debt to gear the portfolio is a key feature of investment trusts that we believe offers a strong competitive advantage over open-ended investment funds. Gearing can enhance investment returns to shareholders. The Board strongly encourages active use of the gearing facility by the Manager but delegates the decision about optimum levels to him.
On 17 December 2021, the borrowing facilities with ING Bank were renewed for a period of three years. The interest rate on the £20 million Fixed Rate Term Loan was reduced by approximately 0.2% p.a., which represents a welcome saving for shareholders. Similarly, the £10 million Revolving Credit Facility was renewed with a lower commitment fee.
At 31 March 2024, net gearing was 2.7%, a level that the Manager considered to be appropriate in light of the macroeconomic uncertainty and volatility in financial markets.
Share Buybacks
The Board is responsible for share buybacks which are undertaken at arm’s length from the Manager. These are regularly considered by the Board and implemented when considered to be in the best interest of shareholders. No shares were bought back during the period under review.
During the life of MUSCIT, the Company has bought back and cancelled 29% of the shares outstanding.
Board
The Board consists exclusively of independent non-executive Directors with a good balance of skills, experience, diversity and knowledge of the Company and its business.
On 1 January 2024, Yuuichiro Nakajima was appointed as a non-executive Director. Yuuichiro is the founder and managing director of Crimson Phoenix, a specialist cross-border M&A advisory firm, providing advice on Japan-related transactions and a range of corporate strategy initiatives from offices in Tokyo, London and Frankfurt. Yuuichiro spent 10 years with S.G. Warburg (later SBC Warburg) and four years with PricewaterhouseCoopers. For nine years until July 2023, Yuuichiro was a non-executive director of JPMorgan Japan Small Cap Growth & Income plc. We are delighted to welcome such an experienced Director to the Board and he has already made a valuable contribution.
Environmental, Social and Governance (“ESG”)
The Board and Montanaro believe there is a strong correlation between how well a business fares on ESG grounds and the value it creates for its shareholders. This is why ESG considerations form an integral part of the Manager’s assessment of a company’s “quality” and have been fully integrated into the investment process for many years.
The depth of Montanaro’s commitment to ESG is perhaps best exemplified by the fact that they are one of the few UK asset managers to be a certified B Corporation – a certification Montanaro have held since 2019. Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose. The certification was renewed for a further three years in 2022. Montanaro’s score rose from 81.8 to 105.5 (classified as “outstanding”), demonstrating their commitment to continual improvement.
Please refer to pages 6 and 7 of the Annual Report for more on ESG.
Annual General Meeting
The Company’s Annual General Meeting (the “AGM”) will be held on Thursday, 25 July 2024 at 12pm at the offices of Montanaro Asset Management, 53 Threadneedle Street, London EC2R 8AR. Shareholders are warmly invited to attend the AGM where, after the formal business has been concluded, there will be an opportunity to meet and ask questions of the Board and the Manager over tea and coffee.
Continuation Vote
We are pleased to report that, at the AGM held on 12 August 2021, over 99% of shareholders voted in favour of continuation of MUSCIT for a further five years. The next Continuation Vote is scheduled to be held in 2027.
Outlook
In recent years, the landscape of the UK stock market has undergone a noticeable transformation, characterised by a gradual shrinkage in its size and scope. One indicator of this trend is the dwindling number of companies quoted on the Main Market. The number of companies in MUSCIT’s benchmark, the NSCI, has fallen to c.350 compared to around 1,000 at the turn of the century. The number of those companies traded on AIM has shrunk by 56% since its peak in 2007.
This is, to say the least, a very negative development for the UK as a whole. Historically, the British stock market has been renowned for its diversity and breadth, offering investors a wide array of investment opportunities across various sectors. The UK has been home to many world-leading companies with outstanding management teams and excellent corporate governance. However, the UK equity market has faced numerous challenges: relatively poor performance especially compared to the United States and some other overseas markets, multiple regulatory changes and of course Brexit. As a result, an increasing number of companies have chosen to delist, move abroad or to seek funding from private equity.
The ramifications of this trend extend beyond mere numerical decline, impacting the vibrancy and competitiveness of the UK stock market as a whole. A shrinking market not only reduces the breadth of investment opportunities available to investors but also diminishes the market’s role as a catalyst for economic growth and innovation. With fewer companies listed on the stock exchange, there is a risk of reduced liquidity and market depth, potentially deterring international companies from listing in the UK. It makes international investors less interested in investing in the UK and drives our own savers to look overseas. It is a sorry state of affairs when the average UK pension fund holds less than 4% in UK equities, a far cry from 39% back in 2000.
Sadly, for years the UK has been a notable outlier in its absence of support for its domestic stock market compared to other countries with an active investment environment. China has recently been stepping in to support domestic share prices through investments from state institutions, whilst part of the resurgence in the Japanese equity market has been attributed to the Nippon ISA that has been supporting domestic retail flows. Since 2014, France has had its own version of a Stocks & Shares ISA dedicated to supporting domestic and European quoted smaller companies. Investments in these ISAs now stands at over £2 billion.
We were pleased to hear the Chancellor of the Exchequer recently announced plans to introduce a UK ISA. Although this initiative alone is unlikely to revive the UK equity market, it is nonetheless a step in the right direction. The possible re-bundling of research and broker commissions – currently disallowed under the MiFID II regime – could also help encourage retail investors back into the market. There are other avenues to explore in future such as: incentivising companies to list and remain listed by reviewing tax incentives and simplifying listing rules; abolishing Stamp Duty; and addressing the implications for the smaller end of the market of the ever-growing consolidation amongst wealth managers.
There is a silver lining, however. Today’s challenging environment presents a compelling opportunity for long-term investors to capitalise on favourable valuations for UK smaller companies. The Board was pleased to see Montanaro Asset Management recently take advantage of this opportunity to increase its own stake in the Company.
ARTHUR COPPLE
Chairman