The capacity to innovate or capitalise on niche opportunities is vital to business creation and development. The largest companies in an industry might grab the headlines, but smaller firms are often the innovative force behind new technologies and products.
Smaller and medium-sized companies are the real engine of economic growth. They can spring up to cater for new industries, or adapt quickly to take advantage of a niche in an existing industry.
Many of the UK's most fascinating companies operate behind the scenes. They perform essential functions, often supplying parts, specialist services or equipment that larger companies find it inefficient to produce themselves or own outright. Some have the potential to become the industry giants of tomorrow. Others will thrive as smaller entities.or be taken over by larger rivals.
The long-term potential in this area of the market is huge, both among companies listed on the stock market and those still in private hands. The shares of unquoted companies are generally not offered to retail investors. They tend to be held by a small group, including founding family members and staff. Shares don't change hands regularly, making them illiquid. On the other hand, small and unquoted companies are less well researched, and dedicated investors can find unique opportunities to invest in promising businesses at discounts to larger or listed peers.
One way to gain exposure to this sector is through an investment trust. The closed-end structure means managers don't have to deal with daily inflows and outflows, enabling them to take a long-term view on unquoted, small and illiquid investments. Risk is spread across several companies and expert fund managers monitor holdings on your behalf. Risk is not entirely eliminated, however. Some companies will take longer to bloom; others will inevitably fail.
Artemis Alpha Trust has been managed by John Dodd and Adrian Patterson since its launch in May 2003. They invest predominantly in UK companies, but tend to have a bias towards smaller and unquoted businesses, at 45 per cent and 30 per cent respectively. The portfolio is diversified, with more than 100 holdings, but the managers back their strongest ideas with conviction, and will build big positions in individual sectors or stocks. This means performance can differ markedly from the FTSE All Share benchmark.
Mr Dodd has specialised in the energy sector throughout his career, so it is not surprising to see about 38 per cent of the portfolio invested here. Four of the top five holdings are energy companies. Hurricane Energy, an unquoted company which has discovered oil west of the Shetland Islands, is the largest at 6.9 per cent. Providence Resources and Africa Oil also feature. The former is an AIM-listed stock involved in oil production in the UK and off Ireland. The latter is a Canadian-listed company exploring for oil off Africa.
Elsewhere, Messrs Dodd and Patterson are focusing on companies with strong management, overseas earnings and an online presence. The Hut Group, also unquoted, is the UK's leading multi-website online retailer, spanning women's fashion, health and beauty and entertainment. It generates 35 per cent of its sales overseas and accounts for 4.2 per cent of the portfolio.
Mr Dodd and Mr Patterson also use ideas from other Artemis fund managers, giving them further experience and resources. The Artemis investment team holds roughly 18 per cent of the trust's shares personally.
This is a higher-risk trust aimed at adventurous investors. In addition to large holdings in illiquid, unquoted companies and more volatile smaller businesses, the managers borrow money to invest (also known as gearing). This adds risk to the portfolio, exaggerating both rises and falls in value. Gearing currently stands around 15 per cent. At the time of writing the trust stands on a 7.1 per cent discount to net asset value.
I view this as a well-managed trust providing exposure to companies with excellent growth prospects. For those able to tolerate the additional risk, a small position tucked away for the long term could add some spice to a well-diversified portfolio.
Richard Troue is an investment analyst at Hargreaves Lansdown (hl.co.uk)Reuse content