Mark Dampier: Small can be beautiful for those investors who think long term
Friday 06 December 2013
Ask most investors where they think the best returns have come from over the past 20 years and "emerging markets" is likely to be a popular answer. I have always been a fan of emerging markets and economic growth has indeed been strong. It should be remembered though that strong, economic growth doesn't necessarily translate into stock-market returns.
I have made the point about divorcing economic and stock-market prospects many times, most recently in relation to Europe. Many investors have ignored the region because of its economic woes, but it is home to many great companies and stock markets there have performed well of late.
Similarly, I find many investors happily write off their own stock market or economy far too easily. The problem is probably one of not being able to see the wood for the trees. It is easy to be negative when the city and financial pages of newspapers are full of woe.
Yet the UK is full of excellent companies and not just those in the FTSE 100 that most investors have heard of. The UK Smaller Companies sector has been a lucrative place in which to invest over the past 20 years, with the average fund rising 574 per cent compared with 186 per cent for the average fund in the Global Emerging Markets sector.
During my working life smaller companies have evolved as an investment. They used to be highly sensitive to what was happening in the wider economy and any recession would see them plummet. Just look at what has happened over the past five recessionary years – smaller companies, as measured by the Numis Smaller Companies Index, have outperformed the main FTSE 100 Index by almost 150 per cent.
One of the best funds in the sector and one we have been investing in for over 10 years is Old Mutual UK Smaller Companies, which is managed by Dan Nickols. Old Mutual has had a cracking UK team for quite some time and their mid-cap fund has also performed well. More recently they recruited the highly regarded Richard Buxton to run the UK Alpha Fund, which focuses more on larger companies.
I recently caught up with Mr Nickols and found him optimistic. Perhaps this is surprising given the fund's superb performance over the past five years. I might have expected him to suggest a setback was due. We started by discussing his economic outlook, and he expressed a high degree of confidence in the UK's economic recovery. He also made the point that the global economy looked relatively robust and he expects investors' appetite for riskier assets to remain.
The fund has been repositioned to reflect his positive view. Less is now invested in defensive companies that tend to perform better when the economy is weaker. Exposure to smaller companies in the market has been increased – at one point the fund had 70 per cent overlap with the Mid Cap Fund, but this has been reduced to 45 per cent.
Mr Nickols also suggested he expects earnings growth of around 10 per cent next year, which is below the historic average, but he still believes smaller companies will be capable of generating better returns than most other asset classes.
The number of companies listing on the stock market has increased in 2013 and Mr Nickols believes this will continue. He is encouraged by the quality of those coming to the market and believes this will be a source of opportunity. Short-term setbacks could be caused by on-going speculation over the US slowing its quantitative easing programme, but this may throw up buying opportunities.
With the fund around £760m in size it can take longer to buy positions in very small companies and Mr Nickols has increased the number of holdings in the fund. He is not short of opportunities though, with Restaurant Group, Telecom Plus, and Topps Tiles among those he highlighted as having good growth potential.
Smaller companies are often overlooked because they tend to be inherently more volatile. In 2008 they had an awful year, for example, but they bounced back stronger than almost anything else. If you can think long term, as you should with areas like emerging markets anyway, UK smaller companies should also form a part of your portfolio. I believe Old Mutual has one of the best teams on offer.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent
Scottish Power hit with sales ban by regulator
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Midweek Money: The end (of the tax year) is nigh: act now
Bank-beating exchange rates on your international payments
- 1 What happens to your body when you give up sugar?
- 2 Have sex with your iPad thanks to the new sex toy no-one asked for
- 3 Bali nine: Welcome to 'Execution Island' – the Indonesian holiday resort where foreigners are sent to die
- 4 The 'sex selfie stick' lets you FaceTime the inside of a vagina
- 5 Why you're almost certainly more like your father than your mother
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Ukip would cut billions from Scottish budget to fund English tax cuts
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
Boris Nemtsov shot dead: Outspoken Putin critic who had expressed fears for his life is killed near the Kremlin
iJobs Money & Business
£8 per hour: Recruitment Genius: This Pension Specialist was established early...
£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...
Day In a Page
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 deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
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
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads