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First State&#39s small cap aiming to fit a mixed market

First State&#39s British smaller companies fund manager Paul Jourdan hopes that inflows into the £40m portfolio will accelerate as performance continues to outstrip the stockmarket and rival firm.

Jourdan says he would be comfortable managing up to £100m with his small-cap focused process, which has returned more than 30 per cent over the past three years. But although inflows have begun to pick up – he says the fund only really became marketable 12 months ago – they are still not as strong as many IFAs anticipated, which he attributes to the length of the sales cycle.

However, sales, or the relative lack of sales, are not his immediate concern. “The big question at the moment is how to handle markets worried about interest rates and geopolitical risks. There are mixed signals and trends at the moment and it is difficult to take a strong view about where you should be.”

He says oil stocks have been “unbelievable” over the past six months but fears they could be at the top of their cycle. His concerns about mining prompted him to reduce his exposure to the sector last month which he hopes will be a temporary measure.

“China will engineer a soft landing, down to about 7 per cent from 12 per cent, I believe. It won&#39t be zero. Base metals are in huge demand there and there is little new capacity coming through over the next two years. I hope it is not dead.”

Jourdan says there are good opportunities in biotech and pharmaceutical firms, some of which have become “very cheap”. But, as with many other managers, he is underweight in the housing market, although he is at pains to point out that the long-predicted crash has not happened. Overall, he sees both opportunities and barriers in the market as a whole.

“The broader market has slightly got the wind going against it, with worries over inflation and the housing market getting the upper hand. But it is creating new opportunities and there are good stocks out there, although I do not have a strong sector view.”

Jourdan does have a skew towards micro caps, however, which he counters with bigger, more liquid, companies. “We still have quite a bias towards small cap, which we review quite a lot. If the market is going to fall we do not want to be in micro caps, we want to be in big liquid stocks. The broader economy looks all right but there are still plenty of risks around.”

The fund holds around 80 stocks, more than 25 of which are “really tiny” – below 0.8 per cent. But this is offset by the top 10 holdings, which collectively comprise around 25 per cent of the portfolio. Turnover is relatively high – driven by new issues and fund raising – but Jourdan is usually in no hurry to buy and sell stocks.

He is also reasonably bearish about the months ahead although he still sees potential with a good number of firms. “We are looking at Iraq becoming a big disaster and the presidential election is coming up. There are a lot of things to correct in the US. Here, the housing market is fragile but there are still plenty of good firms around.”

Nevertheless, he says there is too much going against the markets to repeat the performance of the last 12 months, when returns topped 50 per cent. “We have got some holdings that can give us good revenue but it just depends when. There is too much of a headwind against us to do the same kind of performance again,” says Jourdan.

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