PRESENTER: I’m Claire Long, Head of Investment Trusts at Premier Miton. With me is Gervais Williams, co-manager with Martin Turner of the Miton UK MicroCap Trust. Gervais is here to provide an update on the trust, in particular how it has fared over the past six months since we last caught up. Thank you, Gervais, for coming in. The global stock markets have given us quite a rollercoaster ride over the past six months or so, what has that meant for the very smallest companies, Microcap companies more specifically?

GERVAIS WILLIAMS: What we’ve seen in the last 12 and actually the last six months as well is generally inflationary pressures have been more persistent than originally expected. Interest rates have had to rise, probably more than originally expected, and therefore the valuation of bonds and, indeed, equities have both come down considerably over the last sort of 12 months. Small quoted companies are businesses themselves, their share prices have weakened, and so generally asset valuations have fallen in the last 12 months, and that’s been very true of the smallest quoted companies as well as many others.

PRESENTER: You mentioned interest rates. We’ve seen a series of interest rate rises recently and it’s widely suggested that the UK is heading for recession, if it’s not already in one, should investors be concerned?

GERVAIS WILLIAMS: It’s not good news for companies when there’s a recession. It means sales are falling, margins come under pressure. But most particularly obviously we’re selecting for companies which are more resilient, companies which are not just surviving but hopefully thriving, and most particularly when you get companies which actually unfortunately go into insolvency, you get to a stage where actually the quoted companies can keep the businesses alive. They buy them debt free from the insolvency company. But most particularly they are then able to keep the jobs together, keep the recovery coming through and actually enhance the ability of them, their ability to make actually good ongoing profits in the longer term.

PRESENTER: So you’re still finding interesting investment opportunities out there. Are there any particular areas, any particular sectors of special interests for you in the microcap world?

GERVAIS WILLIAMS: Yes. I mean we’re looking for companies which are relatively resilient. This is typically companies which aren’t that affected by the recession. These are companies which often are in little subsectors, which we’re able to continue to expand even when there’s a slow period of economic growth alongside. Specifically we find the individual companies where share prices have fallen, some cases too far relative to where we considered a fair value is, and that means if anything the opportunities have actually improved in the last six months.

PRESENTER: And you’ve said before that a key element of this trust is its exposure to immature income, what do you mean by immature income and in this context what do you see, are there any particular opportunities you see for the trust in 2023?

GERVAIS WILLIAMS: So when we select companies for the portfolio, these are small quoted companies. Specifically they are companies where you’re seeing the opportunity for them to grow at a faster rate than many of the mainstream companies. But most particularly when we say immature income, what we really mean is these are companies which are set to generate substantial cash surpluses in the longer term on their investment. And if we can identify them before that’s become apparent, as that starts to come through, then the share prices come through. So it’s quite different from any other trust which actually try to buy companies which are growing very fast, albeit they’re absorbing a lot of cash, we’re looking for companies which are finishing their investment period, ready to generate some surplus cash and in that regard we call them immature income.

PRESENTER: Yes I see, so plenty of opportunities still going forward.

GERVAIS WILLIAMS: Well most particularly actually. There aren’t that many fund managers which actually look for companies which are going to generate surplus cash. They often look for things which are going to grow pretty fast, companies which are very exciting about the future, perhaps their share prices tend to move on a little faster, but most particularly they carry a lot of extra downside risk if they don’t hit their targets. These companies to some degree are companies where if you disappoint, certainly their share prices come down, but they’re less vulnerable compared with perhaps some of those highly volatile companies.

PRESENTER: That’s a very useful update, Gervais. Thank you very much for coming in.

And thank you for listening. To find out more about the trust, please visit its website www.mitonukmicrocaptrust.com, where you’ll find links to its annual and interim reports, fact sheets, insight notes and more.