Montanaro UK Smaller Companies Investment Trust PLC · LSE:MTU
Montanaro UK Smaller Companies Investment Trust — UK Smaller Companies Investment Trust — Investor Presentation (March 2004)
53 slides from Montanaro UK Smaller Companies Investment Trust's investor presentation, Mar 31, 2004
Slide 1: UK Smaller Companies Investment Trust PLC
UK Smaller Companies Investment Trust PLC 31 March 2004 www.montanaro.co.uk
Slide 2: Contents
Contents ● Montanaro ● Investment approach ● Current portfolio ● Performance ● Why invest in UK Small Companies? ● Outlook 1
Slide 3: Montanaro
Montanaro MWIONTANARO
Slide 4: Montanaro specialise in quoted small companies
Montanaro specialise in quoted small companies ● Established for over 13 years (1991) - independent ● Our investors are leading financial institutions ● Four core small company funds with four different mandates: Structure Launch Mandate Size • Investment Trust Mar 1995 UK companies < £600m £65m • O
Slide 5: One of the strongest specialist teams in the UK
One of the strongest specialist teams in the UK ● High level of in-house resources: Role Team Years at Montanaro Fund Managers 3 23 Analysts 4 10 Support Staff 3 18 Total: 10 51 ● Stable ● Motivated ● Committed ● Sales / marketing strengthened 4
Slide 6: Strong executive team
Strong executive team ● Charles Montanaro (48): Formerly: VP, Merrill Lynch; SVP, Dean Witter; (Fund Manager) – 13 yrs SVP, Drexel Burnham Lambert; Dir, APAX Partners. English (native); some French, German, Spanish ● Chris Hutchinson (41): Formerly: Officer - Royal Navy; general management - (Fund M
Slide 7: We add value
We add value ● Independent: ● objective ● no conflicts of interest ● continuity ● Team of in-house fund managers & analysts: ● internal research ● proprietary financial models ● rigorous & disciplined investment process 6
Slide 8: What matters to us
What matters to us ● A disciplined investment process ● Outperformance of FTSE SmallCap (ex I.C.s) ● Integrity: ● no soft commissions ● no marketing costs charged to fund ● only invest in our own funds ● Low profile ● Good communication: ● semi-annual meetings / quarterly reports ● Performance 7
Slide 9: Investment Approach
Investment Approach MWIONTANARO
Slide 10: We have a rigorous investment process
We have a rigorous investment process ● Identify potential investments: ● our own ideas – initial screen ● in-depth information gathering & preparation ● Understand the business (Qualitative): ● strategic analysis - evaluate key drivers ● assess management - company meetings ● Value the business (Qu
Slide 11: What do we look for?
What do we look for? ● Comprehensible businesses: ● niche franchises, focused, good order visibility ● Growth markets: ● high barriers to entry, organic growth ● Strong market position: ● competitive advantage, pricing power ● Good management: ● track record, insider ownership, Board, corporate gove
Slide 12: Investment style – defensive growth
Investment style – defensive growth ● Key criteria: ● profitable ● low P/E - below 15x (target 12x) ● earnings growth above market ● high returns (ROE; ROA) ● low price / cash flow ● sound financials (gearing; interest cover) ● positive earnings revisions ● value creation (EVA) ● We are not pure Val
Slide 13: We have a large universe to choose from
We have a large universe to choose from ● HGSC (smallest 10% of the Stock Market) – 1,300 companies ● Screen for “Quality / Defensive Growth” companies: ● quoted small companies ● profitable (forecast eps) ● earnings growth > 6% ● price / earnings < 15x ● operating margins > 7% ● pre-tax margins > 5
Slide 14: We structure the portfolio carefully
We structure the portfolio carefully ● Portfolio is the result of bottom-up stock selection ● We manage stock specific risk: ● investment size linked to market cap. / liquidity (1% - 2%) ● top-slice at 5% ● Target 75 - 85 holdings ● We manage sector risk: ● portfolio distribution vs. FTSE SmallCap I
Slide 15: Current Portfolio
Current Portfolio MWIONTANARO
Slide 16: Top 30 holdings
Top 30 holdings (55.1% on 31/03/2004) ● DTZ Holdings 2.7% ● Comino 1.8% ● Fisher (James) 2.4% ● Isotron 1.7% ● Codascisys 2.3% ● Charles Taylor 1.7% ● Wilmington 2.3% ● Linx Printing 1.7% ● Ennstone 2.3% ● European Motors 1.6% ● Countryside Properties 2.1% ● Holiday Break 1.6% ● Care UK 2.0% ● Bovis
Slide 17: We specialise in “smaller” companies (43% <£150m)
We specialise in “smaller” companies (43% <£150m) % Portfolio holdings by market capitalisation 60% MUSCIT Montanaro SmallCap (Ex I.C.s) 50% 47.3% 40% 30% 28.3% 21.7% 20.2% 20.1% 20% 18.5% 13.4% 13.6% 10% 7.7% 5.6% 0.6% 0.0% 0% £0-£50m £50m-£100m £100m-£150m £150m-£250m £250m-£500m >£500m 16
Slide 18: The portfolio is well diversified by sector
The portfolio is well diversified by sector % 45% Montanaro SmallCap (Ex I.C.s) 40% 38.7% 35% 29.6% 30% 25% 20% 17.1% 16.7% 14.6% 15% 13.2% 12.0% 11.7% 9.9% 10% 7.8% 7.8% 7.0% 5.5% 5% 3.9% 0.0% 0.1% 0% Resources Basics Indust. Consumer Services Financials Technology Utilities 17
Slide 19: We monitor sector weightings
We monitor sector weightings 31 Dec 2003 31 Mar 2004 Overweight Overweight Health 3.9% + Construction & Building Materials 3.7% Electronic & Electrical Equipment 2.9% - Health 2.8% Food and Drug Retailers 2.7% - Oil and Gas 2.8% Oil and Gas 2.5% + Cash 2.4% Construction & Building Materials 2.2% o I
Slide 20: Performance
Performance MWIONTANARO
Slide 21: Strong NAV performance in 2003
Strong NAV performance in 2003 Relative Relative Relative March 2004 Returns to SmallCap to HGSC to All-Share Three Months 7.6% 0.8% 0.2% 8.1% Six Months 11.2% -0.4% -2.8% 2.9% Twelve Months 46.5% -15.4% -10.1% 20.0% Launch 75.4% 18.6% 11.1% 32.6% 20
Slide 22: UK small companies outperformed last year
UK small companies outperformed last year % 170 All Share Small Cap ex I.C.s HGSC ex I.C.s Montanaro (NAV) 160 150 140 130 120 110 100 Mar '03 May '03 Jul '03 Sep '03 Nov '03 Jan '04 Mar '04 21
Slide 23: Growth stocks outperformed
Growth stocks outperformed 180 DJ Stoxx SmallCap Value - 61.7% return DJ Stoxx SmallCap Growth - 65% return (3.3% outperformance by growth) 170 160 150 140 130 120 110 Source: Stoxx 100 31/03/2003 12/06/2003 24/08/2003 05/11/2003 17/01/2004 30/03/2004 22
Slide 24: Relative performance attribution (31/03/03 to 31/03/04)
Relative performance attribution (31/03/03 to 31/03/04) Positive Attribution Negative Attribution ● DTZ Holdings 1.81% ● Ricardo Group -1.99% ● Care UK 1.28% ● Ennstone -1.96% ● WSP Group 1.23% ● Greggs -1.26% ● Dechra Pharmaceuticals 1.14% ● Wyevale Gardens Centres -1.09% ● MTL Instruments 0.71% ●
Slide 25: We outperformed for seven consecutive years
We outperformed for seven consecutive years % 80 Trust NAV Annual % Return* SmallCap (ex.ICs) Annual % Return 61.9 60 52.8 46.5 39.5 40 28 22.6 23.9 20 13 11.9 11.8 - -5.5 -5.3 -9.7 -10.8 -11.6 -20 -13.3 -40 -35.3 -40.4 -60 1995/6 1996/7 1997/8 1998/9 1999/00 2000/01 2001/02 2002/03 2003/04 *Years 1
Slide 26: Strong NAV outperformance since launch
Strong NAV outperformance since launch NAV Outperformed SmallCap by 19%, HGSC by 11% and AllShare by 33% 250 Small Cap ex I.C.s HGSC ex I.C.s NAV All Share 230 210 190 170 150 130 110 90 Mar '95 Mar '96 Mar '97 Mar '98 Mar '99 Mar '00 Mar '01 Mar '02 Mar '03 Mar '04 25
Slide 27: Subsequent relative performance
SmallCap outperformance analysis 10% FTSE SmallCap Index - FTSE AllShare Index 8.0% 6M average subsequent relative outperformance 12M average subsequent relative outperformance 5.4% 5.5% 4.9% 4.9% 4.7% Subsequent relative performance 5% 4.5% 4.4% 3.9% 3.7% 1.9% 1.4% 1.3% 0.7% 0% -1.2% -1.2% -1.3% -1
Slide 28: Strong SmallCap outperformance continues
Strong SmallCap outperformance continues 60% Average of subsequent year's outperformance - 8.3% Outperformance of HGSC vs AllShare Subsequent year's relative performance 50% 40% 30% 20% 10% 0% * s ub s eq uent year refers to 2 0 0 4 YTD p erfo rmance -10% 1977 1999 1971 1959 1963 1978 2003* 1972 195
Slide 29: Why invest in UK Small Companies?
Why invest in UK Small Companies?
Slide 30: Small companies give higher returns
Small companies give higher returns ● “The SmallCap Effect”: ● c. 50 years (1955 – 2003) UK outperformance*: 3.9% p.a. ● 5 years (1999 - 2003) UK outperformance*: 8.1% p.a. ● 5 years (1999 - 2003) European outperformance**: 7.4% p.a. ● Returns from quoted small companies can be spectacular as in 200
Slide 31: Small companies are an attractive asset class
Small companies are an attractive asset class ● Since 1993 returns from European SmallCap have shown the second highest performance after venture capital ● Since 1980 returns from UK SmallCap have outperformed every other asset class Total annual returns to 03/04 1 Year 3 Years 5 Years since 1993 si
Slide 32: Why do small companies give high returns?
Why do small companies give high returns? ● They typically operate in niche markets: ● dominant franchises ● more dynamic / entrepreneurial management ● greater flexibility ● better growth prospects ● less currency risk ● Small companies are more cyclical: ● do well in periods of recovery / expansio
Slide 33: UK quoted small companies are attractive
UK quoted small companies are attractive ● An inefficient market: ● 1,300 companies (HGSC) ● under researched ● Opportunity for specialists to add value through: ● own research capability ● high level of in-house resources ● extensive network of local contacts ● Small companies enable institutions t
Slide 34: Outlook
Outlook MWIONTANARO
Slide 35: Small companies appear fairly valued
Small companies appear fairly valued P/E Ratio P/E Ratio (Currently 17, 25% Overvaluation) Long-Term Average P/E - 13.6 20 19.6 16.6 16.5 16.9 17.0 16.4 16.2 16.0 15.7 15.6 14.9 15.2 14.9 14.8 15 14.1 13.6 13.5 13.4 13.6 13.2 12.2 12.0 11.8 11.7 11.4 9.8 10 8.9 7.8 7.8 6.5 5 - 1978 1980 1982 1984 19
Slide 36: UK small companies currently at a premium
UK small companies currently at a premium 30% 26% PE Valuation Discount / Premium Current 7% vs. Peak -38%, 6% Overvaluation 20% 20% Appropriate Discount - 15% 20% 16% 15% 13% 12% 11% 10% 8% 7% 4% 4% 2% 2% 0% -2% -2% -1% -6% -7% -10% -10% -11% -11% -11% -12% -14% -13% -17% -20% -23% -30% -29% -40% -
Slide 37: Fund is attractively valued offering higher growth
Fund is attractively valued offering higher growth March 2004 MUSCIT SMXX HGSC (Ex I.C.s) P/E (Cal. 2004F) 12.9 13.1 13.6 EPS Growth ('04 - '05) 15.2% 14.3% 12.8% Current Dividend 2.4%* 2.4% 2.6% P/E relative to All-Share -15.4% -1.0% 2.2% * Portfolio yield 36
Slide 38: Outlook for 2004
Outlook for 2004 ● Equities to outperform bonds, residential property and cash ● Lower equity returns than 2003: ● no longer interest rate driven (bond bull market over) ● now driven by earnings ● UK quoted small companies likely to continue performing well: ● stable / improving economic environment
Slide 39: Outlook for 2004 (cont.)
Outlook for 2004 (cont.) ● Few catalysts for a sell-off: ● valuation “fair” ● global economic recovery to continue ● alternative assets unattractive ● reduced geopolitical concerns ● Risks: ● dollar collapse ● geo-political risks / terrorism ● credit tightening ● housing market collapse ● hedge fund
Slide 40: Conclusions
Conclusions ● Strong returns and outperformance by UK small companies in 2003: ● momentum / growth stocks led the way ● high beta outperformed low beta by 17% (HGSC) ● high yield outperformed low yield by 20% (HGSC) ● UK small companies outperform in periods of economic recovery: ● outperformance to
Slide 41: Appendix
Appendix MWIONTANARO
Slide 42: UK small companies typically give positive returns
UK small companies typically give positive returns % Return % GDP Growth 140% 14% HGSC GDP growth 120% 12% 100% 10% 80% 8% 60% 6% 40% 4% 20% 2% 0% 0% -20% -2% -40% -4% -60% -6% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 03/04 Source: ABN Amro HGSC Total Return Index, National Statistics 41
Slide 43: Good time to invest in HGSC after recent bear market
Good time to invest in HGSC after recent bear market % Return % GDP Growth 60% 6% 54.2% HGSC GDP growth 50% 44.0% 40.4% 4% 40% 30% 2% 20% 16.5% 18.5% 17.0% 14.4% 10.8% 9.5% 10% 8.5% 8.0% 0% 0.8% 0% -4.1% -4.0% -10% -2% -20% -15.1% -23.1% -24.3% -30% -4% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1
Slide 44: Apart from the 1990s HGSC outperformed
Apart from the 1990s HGSC outperformed % Outperformance % GDP Growth 60% 12% HGSC vs. FTA GDP growth 50% 10% 40% 8% 30% 6% 20% 4% 10% 2% 0% 0% -10% -2% -20% -4% -30% -6% -40% -8% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 03/04 Source: ABN Amro HGSC Total Return Index, National Statistics 43
Slide 45: HGSC has periods of strong relative performance
HGSC has periods of strong relative performance % Outperformance % GDP Growth HGSC vs. FTA GDP growth 30.0% 30% 6% 19.5% 20% 4% 15.6% 10% 6.7% 7.4% 2% 5.3% 1.7% 0.3% 0% 0% -2.3% -1.8% -1.6% -10% -2% -9.5% -12.0% -13.2% -14.0% -20% -17.8% -4% -24.8% -30% -6% 1988 1989 1990 1991 1992 1993 1994 1995 19
Slide 46: Market valuations
Market valuations AllShare March 2004 2002H 2003F 2004F 2005F PEG 03 04 P/E incl loss-makers 35.0 15.0 13.4 12.3 P/E excl loss-makers 15.1 14.4 13.3 12.2 1.51 growth incl loss-makers 4.0% 12.0% 9.6% growth incl loss-makers 2.4% 8.8% 8.8% Dividend 3.2% 3.4% 3.7% SmallCap excl I.C.s March 2004 2002H 2
Slide 47: Sector weightings – small companies more cyclical
Sector weightings – small companies more cyclical ASX HGSC SMX Rel to Rel to Rel to ASX HGSC SMX Rel to Rel to Rel to 20/04/2004 ex IT ex IT ex IT MUSCIT ASX HGSC SMX ex IT ex IT ex IT MUSCIT ASX HGSC SMX Cash 0.0% 0.0% 0.0% 2.4% 2.4% 2.4% 2.4% Cyclical Services 13.1% 36.4% 36.5% 28.1% 15.0% -8.3% -
Slide 48: Style analysis of UK Small Cap Funds
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% Henderson Smaller Companies LeggMason Investors Enterprise Edinburgh Small Companies Source: HSBC (2002) Ivory & Sime UK Smaller Dresdner RCM Smaller Cos Gartmore Growth Opportunities Growth Funds Gartmore Smaller Companies INVESCO English & Int
Slide 49: Defensive growth underperformed last year
Defensive growth underperformed last year 48
Slide 50: Company quotes
Company quotes Dechra Pharmaceuticals PLC “in my limited experience you have proved to be a professional, diligent, intelligent and understanding Care UK plc investor.” "Montanaro are good supporters of our company and take an intelligent interest. Both we and they http://www.dechra.com have benefit
Slide 51: Company quotes
Company quotes Grantchester plc Linx Printing Technologies plc "I was impressed with the Montanaro team. We met three of the investment managers who knew a “The fact that the Montanaro team do their homework and take the trouble to understand our great deal about our business and our people already,
Slide 52: Company quotes
Company quotes Thorntons plc RPS Group plc "We have been most impressed by the thoroughness of Montanaro’s research and analysis and their determination to understand the business. "Montanaro only invested in RPS after a thorough investigation of our business (including a visit to our We have regula
Slide 53: Disclaimers
Disclaimers Important Notice This is a memorandum issued by Montanaro Investment Managers Limited (the "Company") and is for distribution in the United Kingdom only to persons of the kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 199
UK Smaller Companies Investment Trust — Investor Presentation (March 2004) on 6ix