Montanaro UK Smaller Companies Investment Trust PLC · LSE:MTU
Montanaro UK Smaller Companies Investment Trust — UK Smaller Companies Investment Trust PLC (MUSCIT) — Investor Presentation (June 2023)
98 slides from Montanaro UK Smaller Companies Investment Trust's investor presentation, Jun 13, 2023
Slide 1: MUSCIT 2022-2023 Annual Review Webinar
This is a marketing communication UK Smaller Companies Investment Trust PLC (“MUSCIT”) 2022 - 2023 Annual Review Webinar 13 June 2023 “No one knows Smaller Companies like we do” Montanaro Asset Management Ltd 53 Threadneedle Street, London EC2R 8AR www.montanaro.co.uk enquiries@montanaro.co.uk Tel:
Slide 2: History of Montanaro
31 March 2023 unless stated otherwise History of Montanaro • Established in 1991 • Specialists in quoted, global Small & MidCap equities • “Quality Growth” investors • AUM of around £4 billion • “Best Small & MidCap Sustainable Investment Boutique” * - both Trusts MSCI “AA” rated • One of the Larges
Slide 3: The team has grown to 38 including 17 Analysts
31 March 2023 unless stated otherwise The team has grown to 38 including 17 Analysts Bear Bear 40 Market Market 38 38 • 63% here for over 5 years and 39% for over 10 years 36 • 11 different nationalities 35 • 17 Analysts & PMs - average experience 17 years 33 (average age of team 43 years) 30 29 29
Slide 4: What is a Montanaro company?
31 March 2023 unless stated otherwise What is a “Montanaro” company? 1. Established, focused business we can understand 2. Delivering “must have” goods or services in a structural growth market 3. Strong market position - high barriers to entry / pricing power 4. High returns on capital and margins
Slide 5: MUSCIT
31 March 2023 unless stated otherwise MUSCIT To achieve capital growth in excess of the benchmark, the Numis Smaller 1 Objective: Companies (ex-IC) index 2 Strategy: Quoted UK SmallCap (AIM: maximum 40%) 3 Fund Manager: Charles Montanaro / Guido Dacie-Lombardo (Back-up) Tobacco; Alcohol; Weapons; Ad
Slide 6: Top 20 holdings
31 March 2023 unless stated otherwise Top 20 holdings Company Country % Company Country % 4Imprint UK 7.2% Ergomed UK 3.0% Games Workshop UK 4.8% Watches of Switzerland UK 3.0% Greggs UK 4.5% Porvair UK 3.0% Diploma UK 3.8% Boku UK 2.9% Clarkson UK 3.8% Judges Scientific UK 2.9% discoverIE UK 3.8% L
Slide 7: Our companies continue to trade well and are generally positive
31 March 2023 unless stated otherwise Our companies continue to trade well and are generally positive 4Imprint: ‐ Four upgrades during 2022, with sales +45% and EBIT +236% - strong recovery, taking share ‐ 2023 off to solid start - order intake +23% vs 2022 in first four months Diploma: ‐ Strong H1
Slide 8: 4Imprint (promotional products)
31 March 2023 unless stated otherwise 4Imprint (promotional products) • 4imprint is the leading direct marketer of promotional products, primarily in North America, as well as the UK & Ireland • Promotional products are used for marketing & employee loyalty • Tens of thousands of products available
Slide 9: Kainos (IT Services)
31 March 2023 unless stated otherwise Kainos (IT Services) • Established provider of digital services to the UK Government • >300 citizen-government interactions to be digitised • Kainos developed systems for passport renewal, Register to Vote, viewing driver records online etc. • Also, Kainos is on
Slide 10: Key Buys & Sells: 12 months to 31 March 2023
31 March 2023 unless stated otherwise Key Buys & Sells: 12 months to 31 March 2023 BUYS (£m) SELLS (£m) Dechra Pharmaceuticals 5.3 Ideagen Taken over - 11.2 Marshalls 4.1 Treatt - 4.6 Games Workshop 3.9 Biffa Taken over - 4.3 Spirent 3.9 Alliance Pharma - 2.5 Diploma 3.7 AJ Bell - 2.1 Genuit 2.8 Cra
Slide 11: What worked and what didn't
31 March 2023 unless stated otherwise What worked and what didn’t: (12 months to 31 March 2023) POSITIVE Top 5 NEGATIVE Bottom 5 4imprint 2.5% Marshalls -1.5% Ideagen Taken over 1.9% Treatt -1.3% Games Workshop 1.3% NCC -0.9% Cerillion 1.0% Frontier Developments -0.8% Greggs 0.9% Hilton Food -0.8% T
Slide 12: Sectors: overweight Industrials, IT & Health Care
31 March 2023 unless stated otherwise Sectors: overweight Industrials, IT & Health Care INDUSTRIALS Breakdown: 40% Construction & Materials: 5% Electronic & Electrical Equipment: 13% 34% Industrial Transportation: 4% 35% Support Services: 11% 30% 25% 21% 22% 20% 20% 20% 15% 15% 11% 10% 10% 8% 7% 7%
Slide 13: Sales by Country
31 March 2023 unless stated otherwise Sales by Country Eastern Europe, 1% Asia: other, 0% Emerging Markets Middle East, 0% = 8% Western Europe, 13% Africa, 0% Japan, 1% United Kingdom, 46% North America, 30% Australasia, 2% China, 3% South & Central Southeast & South America, 1% Asia, 3% Source: Int
Slide 14: Our Dividend Policy: 1% of NAV paid out each quarter
31 March 2023 unless stated otherwise Our Dividend Policy: 1% of NAV paid out each quarter MUSCIT - Dividend Per Share (GBp) Past dividends are adjusted for the 5-for-1 share split in July 2018 7.00 6.44 6.00 5.52 5.31 5.00 4.52 4.00 26 July 2018: New Dividend Policy announced 3.00 2.60 Non- 2.10 2.
Slide 15: MUSCIT has one of the highest yields within its peer group
31 March 2023 unless stated otherwise MUSCIT has one of the highest yields within its peer group 6% 12m Historic Yield (to 31 Mar 2023) 5.4% 5% 4.5% 4% 3.5% 3.2% 3.0% 2.8% 3% 2.7% 2.0% 1.9% 2% 1.8% 1% 0% Invesco UK Montanaro Numi s Smaller Aberforth Henderson BlackRock JPMorgan UK abrdn UK BlackRock
Slide 16: Our dividend policy has helped keep the discount under control
31 March 2023 unless stated otherwise Our dividend policy has helped keep the discount under control 10% 26 July 2018: New Dividend Policy 5% announced 0% -5% -8% -10% -15% -20% -25% -30% 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Source: Internal, Bloomberg. 15
Slide 17: Performance & Outlook
31 March 2023 unless stated otherwise Performance & Outlook 16
Slide 18: Returns
31 March 2023 unless stated otherwise Returns MUSCIT MUSCIT Benchmark Relative (Total Returns, GBP) (NAV) (Share Price) (Composite, TR) NAV Share Price 1 Year -12.1% -12.4% -7.9% -4.2% -4.5% 5 Years p.a. 0.5% 3.1% 2.0% -1.5% 1.1% 10 Years p.a. 3.6% 5.0% 6.1% -2.5% -1.0% 20 Years p.a. 10.4% 11.7% 8.2
Slide 19: Everything worked against MUSCIT during the Financial Year
31 March 2023 unless stated otherwise Everything worked against MUSCIT during the Financial Year Total Returns - 12 months to 31 March 2023 (GBP) 0% -2% -5% -4% -5% -10% -15% -13% -14% -20% -21% -25% Small v. Large MUSCIT v. Quality v. UK Small - Growth v. Small - Low v. AIM v. Main List Benchmark M
Slide 20: MUSCIT was still the second best performer in the peer group
31 March 2023 unless stated otherwise MUSCIT was still the second best performer in the peer group NAV Total Returns - 12 months to 31 March 2023 0% -5% -10% -8% -8% -15% -12% -17% -17% -20% -18% -18% -19% -25% -25% -30% abrdn UK BlackRock JPMorgan UK BlackRock Henderso Invesco UK Montanaro Numi s S
Slide 21: Last year SmallCap underperformed LargeCap the most since 1998
31 March 2023 unless stated otherwise Last year SmallCap underperformed LargeCap the most since 1998 UK Small v. LargeCap Returns (Numis Smaller Companies (ex-IC) v. Numis Large Cap Index, TR, GBP) 40% 30% 20% 10% 0% -10% -20% -17%-14% -18% -21% -24% -30% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Slide 22: SmallCap underperformed in 14 of the past 18 months
31 March 2023 unless stated otherwise … and it has underperformed in 14 of the past 18 months – a record Number of months of SmallCap underperformance 16 over 18-month rolling periods Sep 1966 Feb 1998 Apr 2023 14 12 10 8 6 4 2 0 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 0
Slide 23: Outflows from UK SmallCap reached record levels in 2022
31 March 2023 unless stated otherwise Outflows from UK SmallCap reached record levels in 2022 Net Flows into UK SmallCap Funds (£ million) 859 647 700 162 200 92 (49) (93) (48) (30 0) (178) (241) (242) (222) (204) (398) (490) (80 0) (906) (1,3 00) (1,164) (1,442) (1,8 00) 2007 2008 2009 2010 2011 20
Slide 24: UK SmallCap is now near the bottom of its historical P/E range
31 March 2023 unless stated otherwise UK SmallCap is now near the bottom of its historical P/E range UK SmallCap - 12-month Forward P/E 20 (Numis Smaller Companies ex-IC Index) 18 16 14 12 10 9.8x 8 Mar 2020: Sep 2022: 6 Oct 2008: 8.5x 8.1x 5.7x 4 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 S
Slide 25: At a 13-year low on an 8-year Shiller P/E
31 March 2023 unless stated otherwise … and at a 13-year low on an 8-year Shiller P/E UK SmallCap - 8-year Shiller P/E May 2007: 30 27.7x (Numis Smaller Companies Index) 28 26 24 22 20 18 16 14 14.7x 12 10 Jun 2003 : Jun 2009: 11.7x 11.7x 8 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Slide 26: SmallCap Growth is trading at a 10-year low
31 March 2023 unless stated otherwise Meanwhile, SmallCap Growth is trading at a 10-year low UK SmallCap GROWTH - P/Book (12m Trailing) 5.00 (MSCI UK Small Cap Growth Index) 4.50 4.00 3.50 3.00 2.50 2.5x 2.00 1.50 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Source: Internal, MSCI, Bloomberg. Note:
Slide 27: MUSCIT is trading close to its long-term average P/E
31 March 2023 unless stated otherwise MUSCIT is trading close to its long-term average P/E MUSCIT- 12m Fwd P/E Aug 2021: 30 29.9x 25 20 Average = 16.9x 17.2x 15 Nov 2014: Dec 2018: 15.4x 15.5x 10 Nov 2008: 7.8x 5 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Source: Internal, Factset. 26
Slide 28: 2022 was the 3rd worst year ever for MUSCIT
31 March 2023 unless stated otherwise 2022 was the 3rd worst year ever for MUSCIT MUSCIT - Calendar Year Returns (TR, GBP) 80% 67% 70% 60% 48% 50% 44% 37% 40% 34% 27% 28% 29% 27% 30% 25% 23% 21% 20% 16% 16% 9% 8% 10% 0% -10% -2% -2% -5% -7% -4% -6% -20% -19% -18% -30% -28% -40% -32% -37% 96 97 98 99
Slide 29: Good years typically follow bad years for UK SmallCap
31 March 2023 unless stated otherwise Fortunately, good years typically follow bad years for UK SmallCap Numis Smaller Companies Index - Worst Returns since 1955 (GBP, TR) 140% Truncated ?? 1Y Return 130% (347%) 117% Return over the next 3Y 85% 78% 79% 80% 67% 47% 46% 28% 32% 30% 13% 18% -20% -9% -8
Slide 30: MUSCIT has grown its NAV at 8.2% p.a. since launch
31 March 2023 unless stated otherwise MUSCIT has grown its NAV at 8.2% p.a. since launch (after fees) Annualised Return since MUSCIT Launch (31 March 1995, all Total Returns in GBP) 9% 8.3% 8.2% 8% 7.1% 7.0% 7% 6.6% 5.9% 6% 5% 4% 3% 2% 1.1% 1% 0% Numis MidCap MUSCIT (NAV) FTSE SmallCap Numis LargeCa
Slide 31: MUSCIT has performed well since launch over 27 years ago
31 March 2023 unless stated otherwise MUSCIT has performed well since launch over 27 years ago Cumul ative NAV Total Returns since MUSCIT l aunch(31 Ma r 1995 - 31 Ma r 2023) 1,400 1,300 MUSCIT 1,200 1,100 Benchmark 1,000 Numis LargeCap Index 8.2% 900 p.a. 800 700 7.0% p.a. 600 6.6% 500 p.a. 400 300
Slide 32: Conclusions
31 March 2023 unless stated otherwise Conclusions 1. A tough financial year (ending March 2023): – SmallCap, Growth, Quality and AIM all underperformed 2. Style headwinds may be ending 3. Expect few changes to the portfolio 4. UK SmallCap valuations are increasingly attractive - more M&A likely: – t
Slide 33: Appendix
31 March 2023 unless stated otherwise Appendix 1) What happens next? 2) MUSCIT 3) Montanaro 4) Philosophy & Process 5) Why Invest in UK SmallCap? 32
Slide 34: What happens next?
31 March 2023 unless stated otherwise What happens next? 33
Slide 35: We are emerging from an extremely turbulent period
31 March 2023 unless stated otherwise We are emerging from an extremely turbulent period Source: Internal, Google. 34
Slide 36: Inflation has climbed at the fastest pace in more than 40 years
31 March 2023 unless stated otherwise Inflation has climbed at the fastest pace in more than 40 years Change in UK Inflation Rate over 12 month +1170 bps (basedBond onYields RPI Index) 15% in 12 months (1980) more than +850 bps doubled inin 12 months 10% 2022 5% 0% -5% -10% -15% 52 54 56 58 60 62 64
Slide 37: Central banks have been raising interest rates rapidly
31 March 2023 unless stated otherwise Central banks have been raising interest rates at a very rapid pace Central Bank Rates 7% 6% BoE ECB 5% Federal Reserve 4% SNB 3% 2% 1% 0% -1% 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Source: Internal, Bloomberg, MSCI. 36
Slide 38: Jan 2022 saw the 2nd biggest rotation into Value in 50 years
31 March 2023 unless stated otherwise Jan 2022 saw the 2nd biggest rotation globally into Value in 50 Yrs MSCI World GROWTH v. VALUE (Monthly Relative Returns, GBP) 10% 8% Mar 2020: +7.0% Relative 6% 4% 2% 0% -2% -4% Apr 2009: -4.6% Relative -6% Feb 2001: -8% Apr 1999: Jan 2022: -7.9% Relative -8.2%
Slide 39: Bond yields have stabilised over the past 9 months
31 March 2023 unless stated otherwise BUT: bond yields have stabilised over the past 9 months 10Y Sovereign Bond Yields 4.5% US 10Y Yield 4.0% UK 10Y Yiel d 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Source: Internal, Bloomberg. Data to 31 May 2023. 38
Slide 40: Inflation could move from headwind to tailwind
31 March 2023 unless stated otherwise … and inflation could move from headwind to tailwind UK CPI Forecasts as at 16 May 2023 12% (based on market interest rate expectations) 11% CPI Forecasts: Dec 2022: 10% 10.9% 9% Dec 2023: 4.2% (down 6.7% y-o-y) 8% Mar 2024: 3.5% (down 6.2% y-o-y) 7% Jun 2024: 1
Slide 41: Quality Growth has delivered the best returns historically
31 March 2023 unless stated otherwise “Quality Growth” has delivered the best returns historically Global Excess Returns by Size & Quality 1,700 (Jul 1989 - Oct 2022, excess return vs T-Bills) 1,600 Small - HIGH QUALITY 1,500 1,400 Small - LOW QUALITY 1,300 Large - HIGH QUALITY +8.1% 1,200 p.a. Larg
Slide 42: MUSCIT
31 March 2023 unless stated otherwise MUSCIT 41
Slide 43: MUSCIT matched the Numis SmallCap Low Yield index
31 March 2023 unless stated otherwise MUSCIT matched the Numis SmallCap Low Yield index Total Returns - 12 months to 31 March 2023 (GBP) 15% 9% 10% 5% 5% 0% -5% -4% -10% -8% -10% -15% -12% -12% -15% -16% -20% -20% -25% -22% AIM Oil (W TI) Gilts US MUSCIT - Numi s Numi s Numi s Numi s Numi s Numi s T
Slide 44: A portfolio of High Growth companies with strong balance sheets
31 March 2023 unless stated otherwise A portfolio of High Growth companies with strong balance sheets Valuation Portfolio Characteristics Numis SmallCap MUSCIT (ex-IC) Index Numis SmallCap MUSCIT P/E (2023F) 17.6 10.0 (ex-IC) Index # Stocks 40 345 Dividend Yield (2023F) 2.7% 3.5% Weighted Market Cap
Slide 45: Our companies typically tend to deliver
31 March 2023 unless stated otherwise Our companies typically tend to deliver – unlike the benchmark Consensus vs Realised EPS Growth (2009-22 Average) 14% 11.6% 12% 10% 8.4% 8% 6% 4.7% 4% 2% 0% -2% -1.1% -4% MUSCIT -6% Numis Smaller Companies (ex-IC) Index -8% Consensus FORECAST (as at January 1st)
Slide 46: MUSCIT has produced higher EPS growth in 7 of the past 8 years
31 March 2023 unless stated otherwise MUSCIT has produced higher EPS growth in 7 of the past 8 years EPS Growth (12-month Trailing) 40% 35% MUSCIT 34% 30% Numis Smaller Companies ex-IC Index 22% 20% 20% 15% 11% 11% 11% 10% 7% 7% 6% 5% 6% 1% 0% -10% -5% -13% -20% 2015 2016 2017 2018 2019 2020 2021 20
Slide 47: A portfolio of consistently High Quality companies
31 March 2023 unless stated otherwise A portfolio of consistently High Quality companies Ave 2015 2016 2017 2018 2019 2020 2021 2022 2015 - 22 Revenue Growth 11% 11% 14% 11% 9% 4% 21% 16% 12% 10Y EPS Growth (Trail.) n/a 11% 11% 11% 11% 12% 12% 13% 12% EBIT Margin 20% 19% 16% 16% 16% 17% 18% 20% 18%
Slide 48: With strong balance sheets (over half have net cash)
31 March 2023 unless stated otherwise … with strong balance sheets (over half have net cash) MUSCIT MUSCIT - Net Debt / Equity (12m Fwd) 50% Numis Smaller Companies (ex-IC) index 40% 30% 2023e: 42% 20% 10% 0% -10% 15 16 17 18 19 20 21 22 2023e: 3% Source: Internal, Bloomberg. 47
Slide 49: ESG is an integral part of our investment process
31 March 2023 unless stated otherwise ESG is an integral part of our investment process 1. We are a certified B Corp 2. ESG has been part of our investment process for almost two decades: - we have our own Sustainability Committee and ESG Checklists - we vote at every AGM (where possible) 3. Our lar
Slide 50: ESG Dashboard: a Portfolio with low Carbon Intensity
31 March 2023 unless stated otherwise ESG Dashboard: a Portfolio with low Carbon Intensity CLIMATE SOCIAL Numis SC Numis SC Source MUSCIT Source MUSCIT Indx Indx Carbon Intensity MSCI 78.4 118.2 MSCI Social Score (1 to 10) MSCI 4.7 4.7 (Scope 1 & 2 / Sales) % Scope 3 Emissions available MSCI 43% 44%
Slide 51: Gearing of c.5% at the end of March
31 March 2023 unless stated otherwise Gearing of c.5% at the end of March - keeping some powder dry MUSCIT Gea ring % Gearing 14% 30,000 Numis Smaller Companies (ex-IC) Index (RHS) 12% 25,000 10% 20,000 8% 6% 15,000 4% 10,000 2% 0% 5,000 11 12 13 14 15 16 17 18 19 20 21 22 Source: Internal. 50
Slide 52: Key Messages for last financial year (to March 2022)
31 March 2023 unless stated otherwise Key Messages for last financial year (to March 2022) 1. NAV declined 5% last year (-3.9% vs benchmark)*: – largely due to the final quarter 2. A year of two halves: – 1H: +9% outperformance; 2H: -10% underperformance 3. Big macro-economic uncertainties: – Ukrain
Slide 53: Montanaro
31 March 2023 unless stated otherwise Montanaro 52
Slide 54: Update on Montanaro
31 March 2023 unless stated otherwise Update on Montanaro 1. AUM of c.£4 billion 2. New member joining as ESG & Impact Specialist in April 2023 (Harriet Evans) 3. MAM renewed its B Corp for 3 years: - with an improved score of 105.5 (v. 81.8 in 2019) 4. In March 2023, MAM announced it will offset 10
Slide 55: Montanaro - history
31 March 2023 unless stated otherwise Montanaro - history • Established by Charles Montanaro in 1991 • Specialists in quoted, Global Small & MidCap • AUM of £3.7 billion • One of the largest Small & MidCap Teams in Europe • “Quality Growth” investors • “Best Small & MidCap Sustainable Investment Bou
Slide 56: A long history of sustainable investing
31 March 2023 unless stated otherwise A long history of sustainable investing MAM ESG integrated MAM joins ESG Handbook Launch of the French Label Impact Cubed founded into our the UN PRI Published Better World “ISR” appointed for investment Fund awarded impact reporting process MAM MAM New NZC 2030
Slide 57: Our clients
31 March 2023 unless stated otherwise Our clients UK EUROPE OTHER 3% 4% 61% 38% 1% 7% 1% Assets under Management breakdown: 61% 27% Wealth Managers Asset Managers / 2% Pension Funds & Charities Banks 2% 32% 10% 29% 17% 1% 1% Insurance, Family Montanaro * Platforms Offices & IFAs 1% 2% 18% 9% Source:
Slide 58: We are different – an Oasis in the City
31 March 2023 unless stated otherwise We are different – “an Oasis in the City” 1. Our Business 2. Exclusive Focus 3. Team approach 4. Conservative (no loss-makers, no unquoteds, no derivatives, no stock lending) 5. We invest in our own Funds 6. Long-term investors 7. All research in-house Source: I
Slide 59: You need a big team to engage with all the companies
31 March 2023 unless stated otherwise You need a big team to engage with all the companies INVESTMENT Committee Charles Montanaro SUSTAINABILITY Committee Chairman of the Board / PM Charles Montanaro (Chairman) Mark Rogers Ed Heaven (Chairman) Kate Hewitt George Cooke Cedric Durant des Aulnois Sarah
Slide 60: The team has grown to 38 - all research is in-house
31 March 2023 unless stated otherwise The team has grown to 38 - all research is completed in-house Bear Bear 40 Market Market 38 38 • 63% here for over 5 years and 39% for over 10 years 36 • 11 different nationalities 35 • 17 Analysts & PMs - average experience 17 years 33 (average age of team 43 y
Slide 61: 17 Analysts and Portfolio Managers with eleven nationalities
31 March 2023 unless stated otherwise 17 Analysts and Portfolio Managers with eleven nationalities Role / Sector(s) Experience Montanaro Qualifications Charles Montanaro PM 41 Years 32 Years BA (Hons) Anthropology, Durham University Cedric Durant des Aulnois PM 23 Years 16 Years MSc from Dauphine Un
Slide 62: Our Team celebrating 50 years of Glastonbury
31 March 2023 unless stated otherwise Our Team celebrating 50 years of Glastonbury Source: Internal. 61
Slide 63: Our Values
31 March 2023 unless stated otherwise Our Values My Word is my Bond Treat your Team as Stay Humble you would your Use Family Common Sense OUR VALUES Look after your Share the same Clients and they will investment risks look after you that your clients do You cannot be good at everything – stick to w
Slide 64: Investment Philosophy & Process
31 March 2023 unless stated otherwise Investment Philosophy & Process 63
Slide 65: Our investment philosophy
31 March 2023 unless stated otherwise Our investment philosophy 1. SMidCap is an attractive asset class 2. Stick to companies you understand (use common sense) 3. Back the best management teams 4. Invest in structural growth 5. Don’t overpay 6. Engage with companies - ESG matters 7. Humility goes a
Slide 66: The SmallCap Effect is a global phenomenon
31 March 2023 unless stated otherwise The “SmallCap Effect” is a global phenomenon Net Total Returns over the past 20 Years (p.a.) (GBP, Dec 2002 - Dec 2022, based on Regional MSCI Indices) 14% SmallCap 11.9% 12% LargeCap 9.9% 10% 9.3% 9.0% 9.3% 8% 7.4% 7.4% 7.0% 6.8% 6% 4.7% 4.8% 4% 2.6% 2% 0% WORL
Slide 67: What is a Montanaro company?
31 March 2023 unless stated otherwise What is a “Montanaro” company? 1. Well-established with a business model we can Understand 2. Focused business in a Structural Growth market 3. Market Leader 4. High Margins and Returns on Capital; strong Balance Sheet and Cashflow 5. Good Management with a Stro
Slide 68: Quality Growth has delivered the best returns historically
31 March 2023 unless stated otherwise “Quality Growth” has delivered the best returns historically Global Excess Returns by Size & Quality 1,700 (Jul 1989 - Oct 2022, excess return vs T-Bills) 1,600 Small - HIGH QUALITY 1,500 1,400 Small - LOW QUALITY 1,300 Large - HIGH QUALITY +8.1% 1,200 p.a. Larg
Slide 69: Our Investment Process is all about identifying Quality
31 March 2023 unless stated otherwise Our Investment Process is all about identifying Quality Stage 1: Is it a good Business? NEW IDEAS: QUALITY ANALYSIS: GROWTH ANALYSIS: • Sector reviews • Quality Checklist • Growth Checklist INVESTMENT APPROVED • Proprietary screens COMMITTEE LIST • ESG Checklist
Slide 70: We have a proprietary quantitative screening tool
31 March 2023 unless stated otherwise Screens: We have a proprietary quantitative screening tool Source: Internal, Bloomberg 69
Slide 71: Our investable universe
31 March 2023 unless stated otherwise Our investable universe QUALITY Rank: 1,600 quoted companies in the UK AAA 10% Highest AA 10% … of which 440 have a Market Cap between £100m and £1.5bn A 20% B 20% 415 of these meet MAM’s C 20% ethical exclusions * D 20% Lowest 190 of these are AAA, AA or A on o
Slide 72: We rank companies to identify the highest quality
31 March 2023 unless stated otherwise We rank companies to identify the highest quality (AAA - D) We assess the QUALITY of the Universe Universe of 30,000 -> 1,000 are AAA - A using 14 criteria: Growth: Leverage: QUALITY Rank: • 5Y Sales Growth • Net Debt / Equity • 5Y EBIT Growth • Interest Cover A
Slide 73: The Quality Checklist is at the heart of our process
31 March 2023 unless stated otherwise The Quality Checklist is at the heart of our investment process BIG YELLOW (BYG LN) COMPETITIVE PROFILE Concentration of Industry Yes 4 K E Y C R I T E R I A Market Leader Yes 4 Attractive Growth Potential YES Low Competitive Rivalry (2 points) Yes 3 Comprehensi
Slide 74: We complete an ESG Checklist for every company
31 March 2023 unless stated otherwise We complete an ESG Checklist for every company MONTANARO ETHICS & ESG CHECKLISTS Social Checklist Score: 6.1 SUMMARY Social Data (Data from column AD) Score % Weight General Comment / Key Issues % Employee Turnover 27% Reasonable tax gap which is explained by va
Slide 75: New ideas are presented to our Investment Committee
31 March 2023 unless stated otherwise New ideas are presented to our Investment Committee Charles Mark George Alex MONTANARO (Chair) ROGERS COOKE MAGNI The Investment Committee has two distinct roles: Gatekeeper to the “Approved List” (Primary): Oversight of all portfolios (Secondary): o Approving n
Slide 76: We visit our companies wherever they are located
31 March 2023 unless stated otherwise We visit our companies wherever they are located Source: Internal. Note: we offset the carbon emissions of our air travel. 75
Slide 77: Why invest in UK SmallCap?
31 March 2023 unless stated otherwise Why invest in UK SmallCap? 76
Slide 78: Why invest in UK SmallCap?
31 March 2023 unless stated otherwise Why invest in UK SmallCap? 1. 1 Higher Returns historically – the “SmallCap Effect”: – SmallCap v. LargeCap: +3.1% p.a. (Jan 1955 - Dec 2022) * – excess returns remain even after adjusting for risk 2. 2 Huge Choice – 1,600 quoted companies in the UK 3. 3 An Unde
Slide 79: Returns – almost Seven Times Higher since 1955
31 March 2023 unless stated otherwise #1: Returns – almost Seven Times Higher since 1955 Cumulative Nominal Return of £1 invested on 1 January 1955 (to 31 December 2022) 10,000 9,000 Numis Small Cap (ex-IC): +14.2% Numis Large Cap (ex-IC): +11.1% £8,326 8,000 SmallCap Effect = 3.1% p.a. 7,000 6,000
Slide 80: UK SmallCap has outperformed LargeCap in every decade bar the 1990s
31 March 2023 unless stated otherwise UK SmallCap has outperformed LargeCap in every decade bar the 1990s UK - Relative Performance by Decade (annualised) (NSCI v. Numis LargeCap, 1955-2022) 12% 11% 10% 9.1% 9% 8% 7.1% 7% 6% 4.8% 5% 4% 3.5% 3.1% 2.8% 3% 1.9% 2% 1% 0% -1% -2% -3% -4% -5% -4.2% 1950s
Slide 81: It has outperformed 62% of the time since 1955
31 March 2023 unless stated otherwise … and it has outperformed 62% of the time since 1955 UK Small v. LargeCap - Annual Returns (TR, GBP) 60% Total # Years: 67 Numis Smaller Companies Index v. Numis Large Cap Index # Years of Outperformance: 42 (62%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 56 58
Slide 82: Global SmallCap has outperformed LargeCap 92% of the time over 10Y
31 March 2023 unless stated otherwise Global SmallCap has outperformed LargeCap 92% of the time over 10Y % of Periods of Outperformance % of Periods of Outperformance 5 YEARS of monthly rolling returns 10 YEARS of monthly rolling returns 8% 30% 283 periods 211 periods in total in total (Feb 95 - Aug
Slide 83: Long-term investors have typically made money in UK SmallCap
31 March 2023 unless stated otherwise Long-term investors have typically made money investing in UK SmallCap Rolling monthly Returns (Jan 1955 – Dec 2022) 3 Years 5 Years 10 Years 2% 13% 87% 98% 100% POSITIVE Returns NEGATIVE Returns Source: Internal, Numis. 82
Slide 84: SmallCap has been a great asset class for long-term investors
31 March 2023 unless stated otherwise SmallCap has been a great asset class for long-term investors % of POSITIVE Returns - Numis Smaller Companies Index (based on rolling monthly returns, Jan 1955 - Apr 2023, GBP) 98% 100% 100% 100% 100% 100% 87% 90% 73% 76% 80% 70% 66% 60% 50% 40% 30% 20% 10% 0% 1
Slide 85: SmallCap has outperformed all other major UK asset classes bar MicroCap
31 March 2023 unless stated otherwise SmallCap has outperformed all other major UK asset classes bar MicroCap Annualised Real Returns (1955 - 2022, GBP) 12% 10.6% 10% 9.1% 7.8% 8% 6.5% 6.1% 6% 4% 2.9% 2.1% 2% 1.5% 0% Treasury Bill s Long Gilt s House Prices * UK LargeCap UK All Share UK MidCap UK Sm
Slide 86: SmallCap is slightly more volatile than LargeCap
31 March 2023 unless stated otherwise SmallCap is slightly more volatile than LargeCap Volatility of Returns over the past 20 Years (annual.) (GBP, Dec 2002 - Dec 2022, based on Regional MSCI Indices) 25% SmallCap 20% LargeCap 20% 18% 18% 18% 18% 16% 16% 15% 14% 15% 13% 13% 13% 10% 5% 0% WORLD (Dev.
Slide 87: SmallCap has given higher risk-adjusted returns
31 March 2023 unless stated otherwise … but SmallCap has given higher risk-adjusted returns Risk-adjusted Returns over the past 20 Years (Return / St Dev) (GBP, Aug 2002 - Aug 2022, based on Regional MSCI Indices) 0.80 SmallCap 0.67 0.68 0.70 LargeCap 0.62 0.58 0.60 0.52 0.48 0.50 0.44 0.41 0.39 0.4
Slide 88: A Large Universe – we are spoiled for choice
31 March 2023 unless stated otherwise #2: A Large Universe – we are spoiled for choice MicroCap: UK - Number of Quoted Companies 600 ~900 companies 500 416 400 300 SmallCap: ~500 companies MidCap: 195 ~150 companies 200 170 LargeCap: 143 138 ~40 companies 118 84 89 100 32 22 26 17 10 1 0 < £15m 15m
Slide 89: SmallCap is Under-researched
31 March 2023 unless stated otherwise #3: SmallCap is Under-researched UK - Average # of Sell-side Analysts by Market Cap Range (£) MicroCap SmallCap MidCap LargeCap 35 too illiquid under-researched less researched over-researched 30 28 26 25 Montanaro's Focus 22 22 20 19 17 17 16 15 11 10 10 8 6 5
Slide 90: Less SmallCap research coverage today than in 2015
31 March 2023 unless stated otherwise And there is less SmallCap research coverage today than in 2015 Average Number of Sell-side Analysts per company (Numis Smaller Companies (ex-IC) Index) 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 15 16 17 18 19 20 21 22 Source: Internal, Bloomberg. 89
Slide 91: Diversification – Small and LargeCap are exposed to different sectors
31 March 2023 unless stated otherwise #4: Diversification – Small and LargeCap are exposed to different sectors UK Small v. LargeCap - Relative Sector Exposures (Numis Smaller Companies ex-IC v. Numis Large Cap Index) Consumer Staples -13% Health Care -12% Energy -8% Utilities -4% SmallCap is OVERWE
Slide 92: An efficient frontier analysis suggests a 30% weighting in SmallCap
31 March 2023 unless stated otherwise An efficient frontier analysis suggests a 30% weighting in SmallCap Annualised Return UK Efficient Frontier (Apr 1983 - Apr 2023) (ba sed on the Numis Smaller Companies & Numis Large Ca p i ndices, TR, GBP) 12.6% 100% 12.4% SmallCap 12.2% Min Risk Portfolio: 12.
Slide 93: SmallCap has outperformed inflation in every decade since the 1960s
31 March 2023 unless stated otherwise #5 - SmallCap has outperformed inflation in every decade since the 1960s Annual Returns per decade - UK SmallCap v. Inflation (Numis Smaller Companies Index v. RPI) 30% UK SmallCap Returns UK Inflation 25.1% 25% 19.1% 20% 15% 13.4% 12.5% 11.5% 11.8% 10% 7.4% 4.4
Slide 94: SmallCap outperformed when bond yields rose from 2% to 15%
31 March 2023 unless stated otherwise SmallCap outperformed by 6% p.a. when bond yields rose from 2% to 15% UK SmallCap Relative Performance v. US Bond Yields 880 18% BEAR MARKET in Bonds BULL MARKET in Bonds 780 1954 - 1981 1981 - 2020 16% UK SmallCap: +17.9% p.a. UK SmallCap: +12.0% p.a. UK LargeC
Slide 95: Inflation has had an impact on Small v. LargeCap performance
31 March 2023 unless stated otherwise Inflation has had an impact on the performance of Small v. LargeCap Periods of RISING INFLATION Periods of FALLING INFLATION Change in AVERAGE return MEDIAN return Change in # AVERAGE return MEDIAN return # RPI over 12 of Small v. Large of Small v. Large RPI ove
Slide 96: SmallCap tends to perform strongly when inflation comes down
31 March 2023 unless stated otherwise SmallCap tends to perform strongly when inflation comes down Average Return of Small v. LargeCap relative to change in RPI (Numis Smaller Companies v. Numis Large Cap indices, over 12 months( RAPID DISINFLATION STABLE RAPIDLY ACCELERATING Inflation Inflation 25%
Slide 97: When inflation slows, SmallCap does better than other asset classes
31 March 2023 unless stated otherwise When inflation slows, SmallCap does better than other asset classes (Total REAL Returns, p.a.) Inflation @ Inflation @ UK LARGE UK SMALL Change GILTS UK CASH Start Finish CAP CAP Disinflation 1975 - 78 +24.9% +8.4% -17% 5% 6% 26% -2% 1979 - 86 +17.2% +3.7% -14%
Slide 98: Disclaimer
31 March 2023 unless stated otherwise Disclaimer IMPORTANT NOTICE This is a marketing communication. This is not a contractually binding document. Do not base any final investment decision on this communication alone. This document is issued by Montanaro Asset Management Limited (“MAM”) for distribu
UK Smaller Companies Investment Trust PLC (MUSCIT) — Investor Presentation (June 2023) on 6ix