Smaller companies in the UK have been an unloved asset class since the 2016 Brexit vote, yet sentiment has recently started to improve. One savvy way to profit from this situation is to buy Montanaro UK Smaller Companies Investment Trust (MTU).

Despite a recent advance in the share price, the trust remains good value trading on a 7.9% discount to the value of its underlying assets. It also pays dividends every quarter and is yielding an attractive 4.8%.

We particularly like its emphasis on quality companies that are ‘in control of their own destiny’, while noting that any post-election strengthening of the pound would be positive for the portfolio’s domestically-focused firms.

Managed by Charles Montanaro, the investment trust seeks to generate capital growth by investing in quoted UK small caps and outperform its benchmark, the Numis Smaller Companies index (excluding investment companies).

It only invests in profitable companies and the diversified portfolio contains 48 holdings.

The fund manager focuses on spotting high-quality, niche companies operating in growth markets, a process drawing the City veteran to firms led by strong management teams and enjoying a winning combination of high barriers to entry, pricing power and a sustainable competitive advantage.

He avoids companies with stretched balance sheets, poor free cash flow or with structurally challenged business models with stiff competition.

The investment trust benefits from an in-house team of 10 analysts who are sector specialists. The team like to meet investee companies regularly to get a better insight into the products and services on offer, and observe the culture.

Analysis of the portfolio shows the fund’s forecast 2020 earnings growth, dividend growth and return on equity (ROE) are all significantly higher than the index, which the investment trust has dramatically outperformed since its 1995 launch.

As at 31 October, top 10 holdings included self-storage leader Big Yellow (BYG), marketing products outfit 4Imprint (FOUR), building products play Marshalls (MSLH) and food packing group Hilton Food (HFG).

Other holdings include Polypipe (PLP), the sustainable water and climate management solutions supplier, identity data intelligence leader GB Group (GBG:AIM) and online investment platform AJ Bell (AJB).

Investee companies Charles Taylor (CTR) and Entertainment One (ETO) recently received premium-priced takeover bids, demonstrating Montanaro’s prowess in selecting strategically attractive assets.

DISCLAIMER: AJ Bell is the owner and publisher of Shares. Both the author and editor Daniel Coatsworth owns shares in AJ Bell.

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