Mark Dampier: Smaller solution to the global crisis is worth considering
Investors' eyes are firmly focused on Greece. The impending election and its uncertain outcome are fuelling fear, leading many to postpone investment decisions. It was George Osborne who said last year that we had three months to save the euro. Here we are, virtually a year later, and the can is still being kicked down the road, getting heavier all the time.
Many fund managers would argue that trying to second-guess the wider economic and political environment is impossible. They concentrate on valuing companies, and fortunately for investors, in many cases corporations appear in better health than their governments. I think there are opportunities for investors in this environment. In previous columns I have highlighted equity income funds and more defensive investments with capital preservation at the heart of their philosophy. This week I have turned my attention to an area where I see potential for long-term growth: smaller companies.
The Standard Life Investments Global Smaller Companies fund was launched at the beginning of this year when there was a great deal more optimism in financial markets. This was driven by the European bailout package and improved economic data from the US. By mid-March the optimism began to fade and recent figures from the US and China — and renewed fears over Europe — have driven markets lower.
Despite this, the fund has held up well. This is a reflection of the type of companies in which Harry Nimmo and Alan Rowsell, the fund managers, invest. They adopt a disciplined approach, looking for companies with proven business models. This means they have a preference for profitable companies with recurring revenue streams which stand a good chance of becoming tomorrow's success stories. Not all will succeed though.
Given Mr Nimmo's pedigree running UK smaller companies funds, it is hardly surprising to find 15 per cent of the portfolio invested in the UK.
Despite stock market turbulence, many UK smaller companies have remained resilient.
Oxford Instruments is an innovative, high-tech toolmaker that continues to expand into new markets and is an example of one of their favoured UK holdings.
The managers are also positive on the US stock market where they have approximately 45 per cent of the portfolio invested. They are finding opportunities among companies such as Catalyst Health Solutions which manages healthcare drug benefits for large corporations. The company has recently received a takeover approach owing to its exciting growth prospects. It also owns US pharmaceutical company Questcor which is benefiting from flagship product Acthar for the treatment of infantile epilepsy.
Messrs Nimmo and Rowsell are also finding opportunities in south-east Asian markets such as Thailand, Indonesia and the Philippines. Emerging markets are riskier, but some benefit from young populations, growth and falling inflation.
Overall, around 30 per cent of the fund is invested in consumer-related businesses. While some of this is represented in the fund's Asian holdings, exposure to the consumer sector is diversified globally. The managers hold the fashion retailers Hugo Boss and Gerry Webber International, for example, both listed in Germany. They also hold Canadian-listed Dollarama, the equivalent of Poundland in the UK, which has seen strong sales growth.
The smaller companies universe is remarkably under-researched, and doing your homework can pay dividends, so I believe this fund is worthy of consideration.
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 www.h.l.co.uk/independent
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