Many fund managers would argue that trying to second-guess the wider economic and political environment is impossible. They concentrate on valuing companies and, fortunately for investors, in many cases, corporations appear in better health than their governments. I think there are opportunities for investors in this environment.
This week, I turn my attention to an area where I see potential for long-term growth – smaller companies.
The Standard Life Investments global smaller companies fund was launched at the start of this year when there was a great deal more optimism in financial markets, driven by the European bailout package and improved economic data from the US. By mid-March, the optimism began to fade and recent figures from the US and China and renewed fears over Europe have sent markets lower.
Despite this, the fund has held up well. This is a reflection of the type of companies in which Harry Nimmo and Alan Rowsell, the fund managers, invest. They adopt a disciplined approach, looking for proven business models. They have a preference for profitable companies with recurring revenue streams which stand a good chance of becoming tomorrow’s success stories. Not all will succeed and smaller companies are a more volatile and less liquid proposition than bigger counterparts.
Given Harry Nimmo’s pedigree running UK smaller companies funds it is hardly surprising to find 15 per cent of the portfolio invested in the UK. Despite stock-market turbulence, many UK smaller companies have remained resilient. Oxford Instruments is an innovative high-tech toolmaker that continues to expand into new markets and is an example of one of their favoured UK holdings.
The managers are also positive on the US stock-market where they have around 45 per cent of the portfolio invested. They believe the quality of US company management is superb with an increasing focus on rewarding shareholders. They are finding opportunities with firms such as Catalyst Health Solutions which manages healthcare drug benefits for big corporations. It recently received a takeover approach owing to its exciting growth prospects, which has benefited its share price. They also own US pharmaceutical company Questcor which is benefiting from its flagship product Acthar for the treatment of infantile epilepsy.
Harry Nimmo and Alan Rowsell are also finding opportunities in South-east Asia such as Indonesia, the Philippines and Thailand. Emerging markets are more risky but some benefit from young populations, strong growth and falling inflation. They also have an undeveloped consumer market where the managers are identifying growth opportunities. Overall, around 30 per cent of the fund is invested in consumer-related businesses. Some of this is represented in the fund’s Asian holdings but exposure to the consumer sector is diversified globally. The managers hold fashion retailers Hugo Boss and Gerry Webber International, for example, both listed in Germany. They also hold Canadian-listed Dollarama, the equivalent of Poundland in the UK, which has seen strong sales growth.
The smaller companies universe is remarkably under-researched and doing your homework can pay dividends. It is an area where I believe an active manager can outpace a passively managed fund.
Mark Dampier is head of research at Hargreaves Lansdown