It's a wonderful time to be a microcap investor, says Gervais Williams
Gervais Williams, the highly regarded small-cap specialist fund manager and manager of the Miton UK MicroCap trust launched at the end of April, is seeing tremendous opportunities to buy outstanding tiny companies at very low prices in the wake of the small-cap sell-off last year.
'Right now nobody wants microcaps,' Williams says. 'Everyone has given up on them, even most of our competitors.' He gives the example of Shares plc, 'a lovely company doing everything right' - but when it attempted to raise capital by selling some more shares recently, 'the only buyer was us'.
He points to the fact that more than £1.5 billion was pulled out of UK smaller companies as a whole over the second half of last year. The Investment Association's latest 12-month figures, meanwhile, show that the UK smaller company sector saw net retail outflows over every month up to April this year, with only modest inflows in May and June.
Meanwhile, the bottom end of the FTSE small cap index, comprising companies with a market cap of less than about £150 million, is on a 12-month forward price/earnings ratio of 12 to 14 times, compared with around 16 times for blue chips and up to 18 times for mid caps.
Better still, microcap share prices tend to lag market recovery, which means investors such as Williams are able to top up their holdings at lower prices 'even after we believe the market has passed a definite bottom'.
'The fact is that no one is buying little companies, and they are disgustingly cheap,' he says. 'I'm as happy as a sandboy at the moment.'
He has good reason to be. UK MicroCap had a market capitalisation of more than £53 million as at the end of June after two months' trading, and was standing on a 5.6 per cent premium to net asset value.
Meanwhile his two multi-cap income vehicles, Diverse Income trust and Miton UK Multi Cap Income, were in the top 10 of their sectors over one year, and first and second respectively over three years to end June.
Of course, the range of companies at the bottom end of the market is enormous. Williams says that, given the wealth of microcap choice, he does not look to identify the absolute top performer in particular sectors, but simply to see as many companies as possible and select the best of that large group.
'We are able to concentrate on those areas where we believe an individual share price is out of line with other similar quoted businesses, in a universe of stocks that is itself standing at a sub-normal valuation relative to the overall market.'
To that end, Williams does not screen out any sectors or individual businesses. 'I just tell them to come and see me and persuade me I should invest. There are a lot of OK businesses, but the fantastic ones shine out.'
Essentially he is looking for 'companies with a defendable little niche of some kind', but has no preconceptions regarding the sectors they might operate in. 'For example, I don't have any oil or gas companies, and I don't expect to while oil prices continue to fall - but I wouldn't not see them.'
'Neil Woodford is clearly an outstanding fund manager, as is evident from the returns he produces; and he has long had an interest in microcaps. But he is very much focused on technology, so he buys little companies that haven't produced anything yet but could have a cure for cancer in 18 months' time.
'I don't want or need to take those risks - I buy companies that are already productive and generating cash, and will hopefully produce an income in three to five years' time. But there is more than one way of skinning a cat. The two portfolios could be quite complementary to each other.'