Funds investing in UK smaller companies have suffered 33 months of consecutive withdrawals by investors, according to Investment Association data. That doesn’t directly affect Montanaro which, like all investment companies in London, is a “closed-end” fund. Its fixed pool of capital is unaffected when investors sell the shares.
However, open-ended funds have to offload some investments to drum up the cash for exiting investors. That selling pressure has blighted the entire smaller company market and, in combination with ‘growth’ being out of fashion, has led to Montanaro’s underperformance, not because its stock picks are poor.
Its team remains positive on the holdings which it says are financially strong and trading well. Examples include 4imprint, the promotional products company, which has a ‘fortress balance sheet’ and is grabbing market share; and Greggs, the rapidly growing high street baker that felt confident enough to declare a special, additional dividend to shareholders with its annual results.
“Every valuation metric is telling you should be buying at this level,” said des Aulnois who says the market values the portfolio at 10.5 times this year’s forecast earnings, well below the long-term average of 12.4 times.
With UK smaller companies’ valuations not much above their level in the aftermath of the 2008 banking crisis, Questor still believes Montanaro UK Smaller Companies and its rivals offer a double buying opportunity, with shares at a discount to an already cheap market.
This could lead to strong returns over the next five years if sticky inflation doesn’t deter the Bank from cutting interest rates.
Questor says Buy
Ticker: MTU
Share price at close: 101.5p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website
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