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Small caps get a starring role in Isa season

Like most equity sectors, UK smaller companies have not had a particularly dynamic 12 months. The average unit trust in the sector has tumbled by around 20 per cent while the average investment trust is down by around 12 per cent. Nevertheless, industry sentiment towards the sector appears to remain upbeat.

Old Mutual Fund Managers led its Isa season assault with the launch of a UK small-cap fund managed by Ashton Bradbury. Last week, Framlington announced it will kick off the 2001/02 season with a new UK smaller companies fund run by Roger Whiteoak.

SG Asset Management has also suggested it may launch a small-cap fund later this year.

The timing of the Framlington and Old Mutual launches was influenced at least partly by their recent acquisitions of high-profile small-cap fund managers.

Old Mutual, which did not previously manage a smaller companies fund, took on Bradbury in the autumn. He has an accomplished track record in the small-cap arena at both HSBC, where a new fund was launched for him, and Hill Samuel Asset Management.

By keeping him in the wings until February and managing to attain a Standard & Poor&#39s AA rating from launch, Old Mutual has managed to turn the fund into one of this Isa season&#39s biggest sellers.

Bradbury says the fund launch was not driven particularly by market conditions although he is confident those investing now will make money over the next 12 months.

The small-cap market has continued to tumble along with most equity markets over the month since its launch but Bradbury has managed to keep negative returns to just 2.83 per cent. Over the same period, the MSCI UK Small Cap index has fallen by 7 per cent while the average small-cap unit trust has lost more than 8 per cent.

Bradbury says: “The opportunity is good for stock selection, not smaller companies per se. When it comes to smaller companies relative to bigger companies, I do not think there is a lot in it.”

Framlington&#39s story is similar. Whiteoak was recruited from Rathbone Unit Trust Managers in December, since when he has busied himself mostly with institutional fund management and taken control of the £800m UK smaller companies desk.

The existing £100m UK small-cap unit trust has been around for more than 30 years and consequently lacks complete flexibility. The new fund has been launched principally to give Whiteoak a chance to mould a fund in his style from scratch.

Like Bradbury, his past performance record is commendable, having almost doubled the Rathbone UK smaller companies fund in 1999.

Framlington is generally bullish about the UK small-cap market and believes April will be the perfect time to launch a new fund in the sector. Although the company concedes it may have trouble convincing people that now is the time to invest, it is confident it will produce strong performance.

Whiteoak says: “We have got a very strong domestic economy on the back of full employment. There is a lot of Government spending going on and authorities are doing a lot of restructuring. In the short term, you are not going to see a hard landing in the UK and the best way to get good exposure to strong UK markets is through smaller companies.

“I think anyone who puts money in funds at the moment will make money. If you buy in the next six months, you will be near the bottom of a bear market looking towards another eight-year bull market. I can see the small-cap market doubling in the next three years.”

IFAs, too, are fairly positive about the sector. While most fund management firms have focused their attentions on Europe or global funds this Isa season, many IFAs have been directing clients to smaller company funds.

Plan Invest joint managing director Michael Owen says: “In this market, nothing is going to find it easy but, in general, there are more opportunities in the small-cap market than the blue-chip end at the moment. We are quite positive about smaller companies funds now.”

The sector has certainly been making more noise than its peers of late. Although the small-cap fund managers are not predicting a year like 1999, when some funds saw triple-figure returns, the sector appears to be unanimous in its opinion that returns will at least be positive this year.

Furthermore, some are confident enough to predict positive returns for at least five more years.

Given the current instability and uncertainty in most of the world&#39s equity markets, there could be many worse places to put the last of clients&#39 Isa allowances.

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