It's not just the big boys who can deliver a return
The share price fall of smaller UK companies could make them worth a punt this year, particularly if you find the right fund manager. Emma Dunkley reports
Sunday 22 January 2012
As the UK grappled with rising inflation and low economic growth last year, wary investors pulled money out of smaller firms, parking their cash in larger businesses that seemed more robust. But to dismiss smaller companies on the back of last year's performance would be a mistake. As many people have sold out of this sector, now could be a good time to snap up these unloved stocks at attractive prices.
Last year was volatile for smaller companies in the UK, which ended the year down by more than 15 per cent, in comparison with the FTSE 100, which had fallen just over 2 per cent. But Meera Patel, a senior investment analyst at financial adviser Hargreaves Lansdown, says smaller companies can offer some excellent growth opportunities, as they are more nimble and dynamic than larger concerns.
"They often come to the market with a niche product and, if successful, growth can be rapid," says Ms Patel. "Growth can also be sustainable if they conquer an untapped segment of the market and with the right management behind them, can make for a very successful investment."
Compared with the larger businesses out there, smaller companies are more able to grow their earnings, which drives up their share price. Patrick Connolly at AWD Chase de Vere says: "Over most reasonable periods, it is likely that UK smaller companies will outperform larger companies. Smaller companies are usually more dynamic and have greater growth potential than larger firms, which are often at the consolidation stage of their development."
But investing in smaller companies relies on expert stock-picking to find the gems, while avoiding the duds. Gavin Haynes, the managing director of Whitechurch Securities, says: "I would certainly favour investing with a good small companies fund, where the manager is focused on the intrinsic value of individual companies."
According to figures provided by Citigroup, 89 per cent of investment returns from shares in small companies are due to company-specific factors, compared with 29 per cent in the case of larger businesses. Indeed, the best route into this market is through funds, such as unit trusts or investment trusts, where an expert manager can sift through the thousands of companies, in an attempt to select the best stocks while providing diversity so you are not exposed to the same types of companies.
"Importantly, it is down to the stock picking skills of a manager and I would suggest investing in a fund with a proven management team at the helm," says Ms Patel. "This is very important as there are only a handful of proven smaller companies managers around."
Of those tried and tested managers, Ms Patel favours Giles Hargreave, who manages the Marlborough Special Situations and UK Micro Cap Growth funds, although she warns the latter is higher risk.
With the area of small company funds relatively under-researched, there are some real opportunities for fund managers prepared to go the extra mile by getting to know these companies inside out.
"I would recommend the Investec UK Smaller Companies fund managed by Philip Rodrigs," says Mr Haynes. Mr Rodrigs has a team of analysts who look at around 800 companies, in order to find those smaller businesses with auspicious prospects for growing profits, among other factors, from which the best 60-80 stocks are selected. "The performance track record has been very strong and it held up well last year despite the difficult climate," adds Mr Haynes.
The Standard Life UK Smaller Companies trust managed by Harry Nimmo is also a popular pick among advisers, and has grown over 60 per cent in the past three years. Mr Haynes says: "Performance has been very strong under Nimmo and this is an excellent choice if you are looking to invest in a pure UK smaller companies trust."
But if you don't want the risk of investing purely in UK small companies, you can look at those funds which invest in a mix of shares, including medium-sized and larger businesses. Leigh Himsworth, a fund manager at Eden Financial who invests in companies of different sizes, says he is finding some great opportunities in unloved smaller firms. "The key to this year is that if confidence comes back, small companies look incredibly good value."
Yet these funds, and investing in small companies in general, are not without risks. Mr Connolly says the performance of smaller companies can suffer large downturns in adverse economic conditions, as seen in 2008, when the average fund in this sector fell by more than 40 per cent. On the other side of the coin, though, the bounce-back can be swift when sentiment recovers, with smaller companies returning over 50 per cent in 2009 and 30 per cent in 2010.
"Smaller companies are often reliant on the UK economy, which is where they are likely to do most business, whereas larger companies can generate a significant proportion of their revenue from overseas," says Mr Connolly. "Smaller companies are also more sensitive to interest rate rises, and so faster than expected increases would be detrimental to them."
If the UK economy experiences steady growth this year, then smaller firms are on course to do better than their larger counterparts. But should the recovery stutter, or if interest rates rise significantly, then smaller companies are unlikely to do as well.
And given the uninspiring outlook for the UK economy, those businesses solely focused on the domestic market may struggle, as demand for their services or products fall. Mr Haynes says: "Smaller companies are traditionally seen as a higher risk area of the stock market and if risk aversion increases then this area may continue to remain out of favour."
Despite this, others would argue there are many smaller operations which have exposure to overseas markets, so if the UK starts to falter, these businesses could still hold up. But if you don't want to limit placing your money in small domestic firms, there are funds which invest in small companies around the world. Ms Patel says: "If you want to go global, it would be worth considering the Standard Life Global Smaller Companies fund, which is a new launch and is managed by Harry Nimmo."
Mr Connolly warns that you should not lump all your eggs into the small-company basket, as these stocks can be higher risk and should be held as part of a diverse investment portfolio.
Emma Dunkley is a reporter for citywire.co.uk
The managers to watch: Advisers' fund recommendations
Old Mutual UK Select Smaller Companies managed by Daniel Nickols. Ben Seager-Scott of Bestinvest says: "Daniel Nickols pays close attention to the broad economic environment in addition to detailed bottom-up stock analysis in a pragmatic, style-agnostic approach which allows the manager to adapt to a changing investment backdrop."
Marlborough Special Situations managed by Giles Hargreave. Meera Patel of Hargreaves Lansdown says: "We particularly favour Giles Hargreave – he has demonstrated an exceptional stock-picking ability over the longer term."
BlackRock UK Smaller Companies managed by Ralph Cox. Patrick Connolly of AWD Chase de Vere says: "Despite struggling in recent times, the fund has an experienced manager who has built up a long-term record of out-performance."
Investec UK Smaller Companies managed by Philip Rodrigs. Gavin Haynes of Whitechurch Securities says: "This fund provides access to the best ideas of Investec's well-resourced small cap team. Performance under the guidance of Philip Rodrigs has been excellent."
Standard Life UK Smaller Companies Trust managed by Harry Nimmo. Mr Haynes says: "Harry Nimmo has a very strong stock-picking track record, investing in high quality, profitable businesses."
- 4 #JeSuisEd: People share photos of themselves eating awkwardly in solidarity with Labour leader
- 5 Women think Irish men are the sexiest, survey finds
In defence of liberal democracy
General Election 2015: Post-election 'shambles' looms as 70 per cent of voters say SNP 'should not be able to veto UK government policies'
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
General Election 2015: Sturgeon claims Scots 'appalled' by Ed Miliband's refusal to work with SNP
iJobs Money & Business
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...
£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...
Day In a Page
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business