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Mark Dampier: Finding opportunities in UK small and mid-caps

Axa Framlington UK Select Opportunities has a solid track record of finding value in smaller companies. This section is likely to lag in performance but this could be a good long-term investment

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A common criticism from advocates of passive investing is that it is impossible to identify great active fund managers at the beginning of their career. This is a perfectly reasonable criticism and one I agree with. Wait a few years though and it is possible to start picking winners. 

Take, for example,  Nigel Thomas, manager of the Axa Framlington UK Select Opportunities fund. He built a strong track record at ABN Amro from 1987 until he joined Axa Framlington in September 2002 to manage this fund. 

Those who invested at this point based on his previous experience would be pleased with the results. Under his tenure, the fund has grown by 287 per cent compared with 168 per cent for the FTSE All Share.

Thomas is now 59 and facing speculation over when he will retire. He has made it clear to me that he has no imminent plans to do so. 

Eventually, of course, he will retire but the good news is succession plans are in hand, with Chris St John lined up to take over.

The pair already work closely together and St John is doing a good job on the Axa Framlington UK Mid Cap fund. It is good to see succession being considered at an early stage and I regard St John as a safe pair of hands.

Thomas tends to favour smaller and medium-sized companies. With a fund approaching £5bn you might think this could cause problems but he has never had any problem gaining exposure to his favoured smaller companies.

Currently, 60 per cent of the fund is invested in larger companies, which is slightly more than usual. There are two reasons for this. First, 20 per cent of the portfolio has been so successful it has progressed from the FTSE 250 index to the FTSE 100 over the past couple of years. This includes companies like ITV, Travis Perkins and Weir.

The second reason is an active decision to increase exposure to some of the UK’s largest companies – the so called mega-caps. Thomas feels the recent changes to pensions legislation announced in the Budget are a real game changer. Essentially, retirees have more flexibility over how they use their pension to generate an income in retirement and he believes this will create demand to invest in higher- yielding large companies.

The fund is overweight in pharmaceuticals via AstraZeneca, GlaxoSmithKline, Shire and BTG so the recent strong performance among pharmaceutical companies helped the fund.

Thomas adopts a buy and hold approach which means he does not get too concerned if some companies become moderately overvalued. He is happy to wait for earnings growth to catch up with share prices, even if it means a bit of short- term pain. He believes companies capable of strong growth deserve to be highly rated, as some of his medium-sized holdings such as Elementis and Rightmove are today.

However, he believes they continue to have good prospects and will continue to grow earnings over the next three to five years as well as returning cash to shareholders via dividends and share buybacks. He also believes their profit margins are sustainable.

Mark Dampier is head of research at Hargreaves Lansdown

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