There was an interesting article published a couple of days ago by Citywire on the problems at the LF Miton UK Smaller Companies Fund. The fund is managed by well known investor Gervais Williams and Martin Turner and focuses mainly on AIM listed companies. Performance in 2019 was dire with the fund losing 14% when the sector was up 25%. Over the last 18 months this open-ended fund has shrunk by 75% as investors bailed out.
In the Citywire article Gervais is quoted as giving some positive comments including “’The stocks in the fund are particularly undervalued on a relative and absolute basis, with an overall price-to-book ratio of 1.1 times, for example, versus 2.2 times for the FTSE AIM All-Share index”. A quick look at the portfolio gives me some doubts though.
The top holdings are Aquis Exchange, Kape Technologies, CentralNic Group, Totally, Corero Network Security, Kromek Group, Amino Technologies, Frontier IP, Hydrogen Group and Reabold Resources. I have held CentralNic and Corero in the past but not currently. Corero who operate in the digital security (DDOS) sector has been a consistent disappointment over many years with repeated placings required. Perhaps some of these business are undervalued and may turn into winners in due course, but the problem with holding small caps in an open-ended fund is that a hiccup in the overall fund performance causes investors to sell the fund and that means the fund manager has to sell some of the relatively illiquid shares to meet redemptions. That drives the share prices down.
This is similar to the problem Woodford had but in a slightly different form. The Miton holdings are at least listed but probably quite illiquid, i.e. low normal share volume and selling the size of holding that Miton might have would be difficult. But it’s similar in that the managers seem to have lost their touch at share picking.
The situation works in reverse of course if the fund grows in size after a positive period. Folks pile in and the share prices of the shares the fund invests in are driven up.
One has to question whether this kind of fund should be an open-ended fund rather than an investment trust. The bigger the fund grows (it’s now still £57 million in size), the more dangerous the situation becomes.
But for private investors, one way to avoid this “herding” problem is to invest directly in small cap shares rather than in a fund. Any individual investor may have such a small holding that one can move in and out of the shares without moving the share price too much. Or if you still wish to invest in small cap open-ended funds, make sure you jump on the bandwagon when it’s going up and bail out as soon as there are any performance hiccups.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
