Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me Gervais Williams. He is manager of the Miton UK Multi Cap Income Fund.
Hello.
Gervais Williams: Hello there
Black: So, tell us a little bit about what the fund does.
Williams: So, it's a UK fund, investing in companies which generate good and growing income. And it's specifically really targeting good growing income faster than most other funds. It specifically doesn't have a benchmark. It's not trying to keep up with the stock market. It's not trying to even keep up with the other funds in the sector. It's trying to find stocks which through the different range of companies, big and small, we can get more income growth.
Black: So, in recent years, smaller companies have been quite out of favour because of Brexit concerns. You have the ability to invest across the market cap spectrum. So, how have you been positioning yourself?
Williams: Yeah. So, I mean, most of the fund is in mid and small cap companies. There's about a third in the mid and large. So, we can certainly find some good companies at the top end of the market, which are generating good and growing income. The really nice thing about many small companies is, they are a bit overlooked, particularly income small caps, because most people are looking for growth, the next Apple. It means there's not many fund managers looking at the income stocks at bottom of the market. They tend to be undervalued. They tend to grow a little faster in income terms than the big companies. And it's that combination which has been really good for the fund. So, we've seen really nice income growth. The share prices haven't necessarily kept up at this stage, but they'll catch up in time.
Black: So, have you seen the portfolio affected by all of the uncertainty?
Williams: Yeah, certainly, some of the small companies, their share prices haven't gone up as much as they would have done otherwise. Not a problem. Before Brexit, they were rising very nicely, just like mainstream companies, probably a little faster. Over the last two or three years, the bottom end of the market, particularly small, micro, some of the companies at 200 million market cap or 100 million market cap, have actually just not gone up. In fact, in the last few months, some of them have been going down. And so, we've just had to buy some more.
Black: So, income, obviously, a big focus for a lot of investors because rates are so low. How are you finding good income opportunities in this space?
Williams: Well, the wonderful thing is, we have so many to choose from. Compared with the mainstream funds, which have a limited number of large caps which generate a lot of income, a lot of small companies are in different sectors. They're not always covered in the main markets. So, the valuations are low. And so, there's plenty of special stories where people just wouldn't normally think about it and you go and you do the meeting, you realize what they're investing pretty hard for cash paybacks, the stream of cash payback is starting to come through and as that comes through, their dividend growth accelerates, and that drags up their share prices, even if they are very well known stories.
Black: And is the dividend safe? I keep seeing that dividend cover is low, or you get yields that are 12%, 15% and they just don't seem sustainable.
Williams: Yes, I mean, no dividends are entirely safe. These are shares rather than normal bonds. But most particularly, we try and choose companies which are at the safer end of the range. They tend to have stronger balance sheets. If they do have net debt, it's a lesser amount of debt. But most particularly, because they're relatively low share prices, their valuations are low, you tend to get a better yield with a better dividend cover, i.e., safety margin. Doesn't guarantee anything. But it means that actually as a fund – we've missed out on most of the dividend cuts and many of our small companies have actually grown their dividends in spite of worries that people have about the smaller end of the market.
Black: Is there a dividend yield that you get to where you start thinking, no, that seems too good to be true?
Williams: Yeah, it's easy, isn't it? In a way, you could think, well, it must be cheap for a reason. Somebody must know more than I do. But just occasionally, you do find companies which are on 8%, 9%, sometimes 10% or even 11% yields, and you work it out, and you just think, I can't find the reason why we shouldn't be buying this. And so, we do. And so, just occasionally we get wrong, but most of the time they seem to come right.
Black: So, you're obviously really passionate about the small and micro-cap end of the market. What is it that you like so much about these businesses?
Williams: I think what's wonderful is, when you meet the management teams, you're often meeting people who are right at the coalface. In contrast, the really big companies where they have a big sort of a big CEO there, who meets the fund managers, who seems to be quite remote from the operations. At the bottom end of the market, you meet the people actually doing the work. They meet the customers. They know what they're doing. And you get a real kind of insight into how well they manage that business, and what's coming through and the kind of dangers and the opportunities that come through. And I think it's lovely to help them sometimes by funding some of their plans so that they get better cash payback going forward, the company gets bigger, and as it gets bigger, it starts to get more recognized by the fund managers, and it tends to drive the valuation up as well in after time.
Black: Well, thank you so much for your time.
Williams: Thank you very much for being here.
Black: And thanks for joining us.
