Funds bank on small companies recapturing their old glamour: finds a batch of newcomers taking a fresh approach

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The Independent Online
DO YOU need a maverick for a manager? The latest launch by Dublin-based group Singer & Friedlander is a smaller- companies fund called UK Emerging Leaders, to be managed by Terry Smith.

Mr Smith is famous for his book Accounting for Growth, which debunked the creative accounting techniques of a number of the biggest companies. Sacked by his employer, UBS, for blowing the whistle on its clients, Mr Smith reached a legal settlement that reputedly left him pounds 1m richer.

If you want TV soap glamour in the manager of your fund, Mr Smith is your man. A ruthlessly objective approach is needed to smaller company investment, he believes. Getting attached to an investment for no logical reason is a mistake. He also has an unconventional attitude to company visits. Usually, managers make much of the extensive company visiting they undertake. 'If my investment record relied on insights from walking round the company's plant, we'd be in trouble,' Mr Smith says.

He quotes a colleague: 'If this is a good company, why can't I see it in the figures?'

Mr Smith's team at Collins Stewart, an S&F fund management subsidiary, uses a number of analyses to spot winners. For example, if the interest paid for the year is higher than the debt figure at the balance-sheet date, borrowing has probably been massaged down. If a company is claiming margins twice as high as those of its competitors, 'the usual answer is that the margins are not real'.

The S&F fund will cover the bottom 15 per cent of the FT All-Share index, but may also invest in unquoted companies.

Why smaller companies, and why now? Tilney, the regional stockbroking chain, has also chosen this week to launch its first unit trust, the UK Smaller Companies Trust, which will invest in the bottom 10 per cent of the UK equity market.

The rationale behind this type of investment, says manager Jeremy McEntyre, is the historical outperformance of smaller companies. On average, they have risen by 4.3 per cent more than the main market for the last 39 years.

High interest rates and prolonged recession meant smaller companies underperformed the main market by 50 per cent in the four years to December 1992, but since then they have begun to recover.

The Tilney fund will make the most of the group's proximity to Britain's industrial centres - its head office is in Liverpool. It will invest nationally but put emphasis on the North, where smaller companies are less well-researched, giving rise to pricing anomalies.

Another fund with a smaller companies regional bias is M&G's Midland & General. If you had put pounds 1,000 into this fund on New Year's Eve 1967 you would now have more than pounds 53,000.

M&G's senior investment manager, Richard Hughes, puts its record down partly to the remarkable growth from recovery stocks after the end of the 1982 recession.

Like Mr Smith, Mr McEntyre's strategy aims to 'look first at the downside', avoiding companies with inherent weaknesses. He reels off a long list of factors to consider:

Is the company master of its own fate?

How consistent is its earnings stream?

Is management motivated?

Has the company identified a niche?

Is it dominant in the market?

Is it innovative?

Over the long term, smaller companies will outperform but can go through long periods in the doldrums. It is an investment to hold for at least five years. Investors should be prepared to grit their teeth when prices fall. A regular investment is ideal, and the Tilney fund will accept a minimum of pounds 100 a month. The S&F fund is for lump sums only.

Tilney's lump-sum minimum is pounds 500 with charges of 5 per cent initially and 1.25 per cent annually . There is a discount of 2 per cent until 25 October. The fund is PEPable, but as yet Tilney has no other funds should you wish to switch later on.

S&F's Dublin-registered fund has an initial charge of 4.5 per cent and an annual charge of 1.5 per cent, with a pounds 1,000 minimum investment. There is a fixed-price offer at 100p per share from 31 October to 4 November. The fund can be bought through a broker or direct from the company. It is covered by UK cancellation and compensation rules. It can be held in a PEP, but only up to the pounds 1,500 non- qualifying limit.

We can expect lots more smaller-company funds to make their appearance as the industry gets caught up in the glamour of these new arrivals.

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