Investors seeking a ready-made portfolio of high-quality small fry selling at a knock-down price should consider Montanaro UK Smaller Companies (MTU).

The investment trust has a long track record of outperforming peers, and its shares are currently trading at 7.7% below the value of its assets.

While it primarily focuses on capital growth, with the underlying portfolio’s income generation considered to be a byproduct of the stock selection process, Montanaro UK Smaller Companies is a quarterly dividend-payer.

It is currently yielding 5.1% based on the past four quarterly dividend payments and the latest share price.

Managed by seasoned stock picker Charles Montanaro, the £194 million trust invests in high quality, profitable and well-managed growth companies for the long term.

To reduce the risks inherent with investing lower down the market cap scale, the experienced Montanaro avoids loss-makers, highly leveraged names and unquoted or illiquid stocks.

Unfortunately, the good-quality growth names Montanaro favours have sold off sharply since the start of 2022 due to the rising interest rates required to tame inflation.

Yet the sell-off in quality growth names and the net asset value discount on the trust has created a compelling entry point for patient investors since Montanaro believes valuations are now the most attractive that they have been in many years.

The sharp deterioration of the fund’s relative returns since November 2020’s vaccine announcements has pushed the trust towards the bottom end of the peer group performance tables over most short/medium-term time periods.

‘If Charles is right and quality starts to come back into favour, Montanaro UK Smaller Companies could move swiftly back up the rankings,’ says research group QuotedData.

The fund manager believes good quality, well-managed companies with pricing power are best placed to face inflationary pressures. Montanaro UK Smaller Companies’ quality bias is demonstrated by portfolio characteristics including a 2023 forecast return on equity of 18.2%, according to its latest factsheet. 

The portfolio’s constituents have an average price to earnings ratio of 16.5 based on 2023 forecasts, which is attractive for a basket of quality companies. Dividends for the current portfolio are forecast to grow by an average 6.7% next year.

The trust provides investors with exposure to the technology and industrial sectors, among other areas of the market.

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