Investment trust Montanaro UK Smaller Companies (LON:MTU) enjoyed a return to form in the half ended 30 September, delivering a NAV (net asset value) total return of 22.6%. That beat a total return of 19.3% for the benchmark, the Numis Smaller Companies Index.
During H1, ‘MUSCIT’ generated an impressive share price total return of 23.9% as the NAV discount narrowed to 5.5% from 6.2%.
Yet while the fund is ahead of the benchmark over one and three years, it still lags the index on a five-year view. And for now, the smaller quality-growth stocks favoured by the managers remain out of fashion with investors.
Patience rewarded
‘The past six months rewarded investors who remained patient with UK SmallCap, despite a turbulent backdrop,’ commented MUSCIT’s managers, Charles and Adam Montanaro.
Montanaro UK Smaller Companies Trust
They highlighted that MUSCIT’s H1 outperformance was driven by stock selection rather than a friendly market backdrop. ‘Roughly two-thirds of the portfolio’s risk is stock-specific, exactly what we aim for as bottom-up stock pickers,’ the managers explained.
H1 winners
During H1, power controls maker XP Power (LON:XPP) recovered on a sharp rise in order intake. Another winner was The Beauty Tech Group (LON:TBTG), whose shares have more than doubled from the IPO (initial public offering) price at which MUSCIT invested in October 2025, as consumers spend more on professional-grade beauty devices at home.
Other positive contributors included Belfast-based tech firm Kainos (LON:KNOS), which upgraded profit expectations on a record backlog.
Not everything worked, however. ‘Cerillion (LON:CER) fell first on fears of AI disruption to software and later on a delay in booking orders,’ said the managers, ‘although we see this as a timing issue and its pipeline remains strong.’
Positive outlook
‘The market is warming to SmallCap faster than it is warming to Quality,’ insisted Charles Montanaro. ‘This gap is where we see the opportunity.’
However, the managers also sounded a note of caution: ‘It is not often that we report a return of almost 23% over a six-month period. Please do not expect this as the new norm. However, it does show how patience can be rewarded. Valuations remain attractive and the earnings growth outlook looks strong.’
They added: ‘The portfolio is in good shape and companies appear generally upbeat, giving us every reason to be confident about the future.’
We salute MUSCIT for outperforming the benchmark in H1. This was a tricky period in which its quality-growth investing style continued to face stiff headwinds.
Furthermore, the managers’ argument that UK smaller companies remain undervalued is supported by the ongoing wave of M&A sweeping across this part of the UK market, with a number of portfolio companies drawing bids in H1.
| Total return percentage | 1 year | 3 years | 5 years |
| Share price | 21.2% | 33.6% | -11.2% |
| Net asset value | 13.3% | 25.9% | -12.7% |
| Benchmark | 13.5% | 48.3% | 24.2% |
Source: MUSCIT, H1 results
However, one swallow does not a summer make. And MUSCIT remains behind its benchmark over three and five year time periods. As one analyst put it: ‘The recent improvement therefore needs to be sustained before it can be considered a decisive turnaround.’
