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River & Mercantile 'micro cap' trust won't grow too big

Smaller company star to run the new River and Mercantile UK Micro Cap Investment Company that will be capped at £100 million.

 
River & Mercantile 'micro cap' trust won't grow too big

Correction: the investment trust will not be listed on AIM (Alternative Investment Market) as first reported but on the main market of the London Stock Exchange.

River and Mercantile (RIV), the investment group backed by Sir John Beckwith, is launching an investment trust targeting ‘micro cap’ stocks valued at under £100 million.

The River and Mercantile UK Micro Cap Investment Company will be listed on the main market of the London Stock Exchange and will be managed by Philip Rodrigs, the top performing smaller companies fund manager who quit Investec to join the group before its stock market flotation this summer.

Rodrigs, who earned a Citywire performance rating for his management of the Investec UK Smaller Companies fund and who now runs River and Mercantile UK Equity Smaller Companies , said: ‘The premise for micro cap investing is that the smaller the size of the company at the point of investment, the greater the scope for growth.’

The trust will be based in Guernsey and will use an innovative redeemable share structure to ensure the trust’s assets do not grow beyond £100 million. If they do the company will have the discretion to return a portion of shareholders’ capital, reducing the pressure on Rodrigs that a swelling portfolio would pose.

The Channel Islands domicile means the payouts would be taxed as capital, subject to a lower rate of taxation than if the company was based in the UK where the payouts would be taxed as income.

This structure will allow the company to avoid the capacity issues that make investing in very small stocks problematic. One of the best known funds in this area – Marlborough Nano-Cap Growth run by Giles Hargreave – ‘soft closed’ in 2013 when its £90 million size made it too large to trade easily in an out of its holdings. Hargreave’s even better known UK Micro Cap Growth fund focuses on stocks up to £250 million, making liquidity less of an issue.

Investment companies, which are known as ‘closed-ended’ because they issue a fixed number of shares, are regarded as better suited to small, illiquid markets than ‘open-ended’ funds, like Marlborough’s, which can issue an unlimited number of units and shares.

Nevertheless, there are currently no exclusively UK micro cap trusts available, although Strategic Equity Capital (SEC ),  JPMorgan Smaller Companies (JMI ) and Dunedin Smaller Companies (DNDL ) invest some of their portfolios in some of the smallest companies on the stock market.

James Barham, River and Mercantile's global head of distribution, said: ‘If we wanted to gather assets we’d have launched an open-ended fund and have done with it. That’s not what we’re doing.’

The only other notable investment company that dabbles in micro cap stocks is the popular Diverse Income (DIVI ) trust. Run by smaller company veteran Gervais Williams, the equity income fund takes a ‘multi cap’ approach and can invest in companies large and small.

Diverse Income also offers redeemable ordinary shares. Neil Morgan of Winterflood Securities, who is advising River and Mercantile on the launch of the UK Micro Cap Investment Company, said the difference was that while Diverse Income allowed shareholders to choose to redeem some of their shares, the new trust would make the decision itself.

Morgan said redeemable shares were the easiest way to return capital to shareholders and were less cumbersome than operating a tender offer, in which shareholders are given an opportunity to sell back their shares but are not obliged to participate. He said the return of capital would apply pro rata to all shareholders on the trust’s register.

The launch marks a return to investment trusts for River & Mercantile, which originally started life as the River Plate & Loan Company in 1881 before evolving into a manager of a investment trusts in the 1970s. Beckwith bought 50% of the group in 1994 and two years later it sold the investment trust mandates and rebranded as Liontrust Asset Management (LIO), which floated in 1999. Beckwith, who retained the River & Mercantile name, relaunched the business in 2006 and, after a merger with P-Solve, the investment arm of Punter Southall, returned to the stock market in June.

The prospectus for River and Mercantile UK Micro Cap Investment Company will be published shortly.

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