Mark Dampier: Smaller companies can provide big opportunities

The Analyst

Most commentators continue to view larger companies in the UK and around the world as the place to be, myself included. The vast majority have become cheaper over the last 10 years, and the likes of GlaxoSmithKline, Vodafone (and arguably BP, in spite of its current problems) do look good value. In particular, their dividend yields are attractive, at 5 per cent or more in many cases. They also benefit from deriving much of their earnings from overseas, and in currencies other than sterling, notably the US dollar. The increase in these currencies against the pound, which has been comparatively weak over the last couple of years, has enhanced their profits markedly.

By contrast, the general assumption is that smaller companies are domestically orientated and not a good place to invest given the problems faced by the British consumer, not to mention the Government. However, small company investing has evolved over the last 25 years. At one time it was centred on UK-focused engineering companies in the Midlands and the North. Things have since changed, and if we look at the Hoare Govett Smaller Companies Index (which has rallied by around 35 per cent over the last 12 months, outperforming large caps by quite some way), we find that around 40 per cent of company earnings are now from outside the UK. So the idea that a UK Smaller Companies Fund only offers domestic exposure is mistaken.

While the FTSE 100 is dominated by relatively few companies, the UK's smaller firms can also offer important diversification to investors through exposure to a wide range of sectors. Resources, chemicals, consumer goods and technology companies are all areas where overseas exposure can be significant. One smaller companies fund with a large international exposure is the Old Mutual UK Select Smaller Companies. Under the management of Dan Nickols, it has performed exceptionally well over the last five years, increasing by 87 per cent against the sector average of 29 per cent, a strong run that has also easily outstripped larger company funds.

Although overseas earners offer some good opportunities, Mr Nickols believes there is plenty of scope in certain domestically orientated stocks which have exposure to long-term growth trends. These include companies such as Rightmove, which has changed the way in which people search for properties. He also sees opportunities in engineering firms, including Cookson and Weir, where he believes analysts' forecasts are too pessimistic and he expects to see upgrades in earnings forecasts.

The fund managers I have spoken to over the last few weeks all report companies performing ahead of expectations, exactly the kind of news you want to hear because this is what tends to drive share prices higher. In terms of present valuations, smaller companies' stocks at first glance look more expensive than larger ones. However, Mr Nickols expects annual earnings growth to be at least in the mid-teens, which makes the market look pretty cheap.

So here we have a fund with a good blend of top domestic stocks alongside plenty of international exposure benefiting from the fall in sterling. Yet smaller companies are often ignored by private investors for reasons I don't really understand. Over the longer term they tend to outperform larger stocks and offer active fund managers such as Mr Nickols and the team at Old Mutual a chance to add considerable value. While the headlines in the papers might make you feel somewhat nervous, the truth is that many companies continue to prosper and generate profits despite what is going on in the global background. In my view, the Old Mutual team are second to none in this part of the market and this is an excellent fund to tuck away for the long-term.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Life and Style
Small winemakers say the restriction makes it hard to sell overseas
food + drink
Arts and Entertainment
A comedy show alumni who has gone on to be a big star, Jon Stewart
tvRival television sketch shows vie for influential alumni
Arts and Entertainment
Carrie Hope Fletcher
booksFirst video bloggers conquered YouTube. Now they want us to buy their books
News
Clare Balding
peopleClare Balding on how women's football is shaking up sport
PROMOTED VIDEO
Arts and Entertainment
Damien Hirst
artCoalition's anti-culture policy and cuts in local authority spending to blame, says academic
Sport
premier leagueMatch report: Arsenal 1 Man United 2
Arts and Entertainment
Kirk Cameron is begging his Facebook fans to give him positive reviews
film
News
i100
Sport
Jonny May scores for England
rugby unionEngland 28 Samoa 9: Wing scores twice to help England record their first win in six
Life and Style
fashionThe Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Arts and Entertainment
Jason goes on a special mission for the queen
tvReview: Everyone loves a CGI Cyclops and the BBC's Saturday night charmer is getting epic
Arts and Entertainment
Jerry Hall (Hand out press photograph provided by jackstanley@theambassadors.com)
theatre
Sport
Tony Bellew (left) and Nathan Cleverly clash at the Echo Arena in Liverpool
boxingLate surge sees Liverpudlian move into world title contention
Voices
Neil Findlay
voicesThe vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
Life and Style
food + drinkMeat-free recipes and food scandals help one growing sector
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

    Reach Volunteering: Charity Treasurer

    Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

    SThree: Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

    Ampersand Consulting LLP: Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

    Kenyans still waiting for justice over Mau Mau uprising

    Thousands join class action over Britain's role in the emergency
    Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

    The last Christians in Iraq

    After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
    Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

    Britain braced for Black Friday
    Bill Cosby's persona goes from America's dad to date-rape drugs

    From America's dad to date-rape drugs

    Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
    Clare Balding: 'Women's sport is kicking off at last'

    Clare Balding: 'Women's sport is kicking off at last'

    As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
    Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

    Oh come, all ye multi-faithful

    The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
    Dr Charles Heatley: The GP off to do battle in the war against Ebola

    The GP off to do battle in the war against Ebola

    Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
    Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

    Flogging vlogging

    First video bloggers conquered YouTube. Now they want us to buy their books
    Saturday Night Live vs The Daily Show: US channels wage comedy star wars

    Saturday Night Live vs The Daily Show

    US channels wage comedy star wars
    When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

    When is a wine made in Piedmont not a Piemonte wine?

    When EU rules make Italian vineyards invisible
    Look what's mushrooming now! Meat-free recipes and food scandals help one growing sector

    Look what's mushrooming now!

    Meat-free recipes and food scandals help one growing sector
    Neil Findlay is more a pink shrimp than a red firebrand

    More a pink shrimp than a red firebrand

    The vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
    Bill Granger recipes: Tenderstem broccoli omelette; Fried eggs with Mexican-style tomato and chilli sauce; Pan-fried cavolo nero with soft-boiled egg

    Oeuf quake

    Bill Granger's cracking egg recipes
    Terry Venables: Wayne Rooney is roaring again and the world knows that England are back

    Terry Venables column

    Wayne Rooney is roaring again and the world knows that England are back
    Michael Calvin: Abject leadership is allowing football’s age-old sores to fester

    Abject leadership is allowing football’s age-old sores to fester

    Those at the top are allowing the same issues to go unchallenged, says Michael Calvin