Special Report on Investment Trusts (7): Confidence begins at home: Rupert Bruce asked three senior analysts to recommend areas and trusts for 1993 and found a consensus of opinion

THE THEORY that smaller companies' stocks outperform larger ones over reasonably long periods of time should be borne out in 1993, according to investment trust managers.

The Independent spoke to senior managers at three of the largest investment trust groups, who between them manage a fifth of the total pounds 27.3bn UK investment trust market. When asked which investment areas and trusts they favoured, a clear consensus emerged in favour of UK smaller companies.

The managers said they expected smaller companies' stocks to perform well in reaction to lower interest rates and improving economic conditions. They pointed out that these smaller companies were the most sensitive to domestic economic conditions because they participated in relatively little overseas trade.

Also in favour were the emerging stock markets of South-east Asia and Latin America. Managers expect these markets to offer high rewards, but warn that they are high risk.

Lord Mark Fitzalan Howard, chairman, Fleming Investment Trust Management: 'I like the UK but that is on the basis of the hoped-for recovery really being now likely to materialise, although there is still an element of hope there.

'I think the other area which we would like to suggest is the Far Eastern markets, excluding Japan, where we believe there is going to be considerable growth in 1993.

'We would include Hong Kong in the firm belief that the posturing at the moment (the diplomatic row between Chris Patten, the Governor, and China over the degree of democracy in the colony) appears perhaps more extreme during this preliminary stage of debate than perhaps is, in reality, the case and that a solution will be found.

'Undoubtedly it is going to be volatile, but I think that for those people who can look at it for the long term it is probably no bad thing to start buying.

'In all we would expect returns in excess of 15 per cent from the region including Hong Kong, Malaysia, Singapore, Philippines, Thailand, and Indonesia.

'On actual investment trusts within our portfolio, I think we would include Fleming Far Eastern Investment Trust.

'Another is Fleming Fledgling Investment Trust, the smaller companies trust. That is about 40 per cent in the UK. We believe that if we are going to see a turnaround in the UK economy then this neglected area ought to make itself felt.

'The trust also has a little under 30 per cent in the US, about 30 per cent in Europe and 8 per cent in Asia.'

Michael Moule, a senior investment manager, Touche Remnant: 'I still think the UK is going to be a good market, even though it has had a strong run. You are in an interest rate-driven market, and I am still bullish that interest rates are going to come down. That is one of the keys to it. Just like the US, you are going to have people saying, 'I cannot believe how expensive this market is'.

'It is going to be driven by money not earning enough in the bank and the building society rather than some wonderful economy and you are going to have to push out your hopes of the economy picking up until 1994.

'But personally, it is Europe and particularly France, Holland and Spain that excites me most.

'My view is that eventually the Europeans will wake up to realise that in the short term the main problem is lack of growth and rising unemployment rather than inflation.

'If I am being judged over the year I would be very happy to be in TR European Growth. It also happens to be on a 25 per cent discount to its net asset value (at time of writing), which is very high. This is because Europe is so unpopular and because it invests in smaller companies whose share prices rise later than larger ones.

'I think the UK has already had the big company effect so you really ought to go for medium and smaller companies where you have had this very big bear market. You have spent five years since October 1987, when they reached a peak, in a bear market. So I quite like TR Smaller Companies.

'I also like TR Far East Income because I still see South-east Asia doing rather well.

Jeremy Tigue, a director of Foreign & Colonial Management: 'In the American market we think smaller companies will do better than larger companies. Any improvement in the US economy will be particularly good news for US smaller companies. There are a lot of them out there, they have done very badly in the 1980s, although they have done a bit better in the last couple of years.

'We are also quite hopeful about prospects for UK smaller companies. The only caveat is that everyone seems to be thinking the same way and we saw in the States a bit of a false dawn a couple of years ago.

'One can't help feeling that there is a danger that might happen to smaller companies this year here. But the prospects for smaller companies here with lower interest rates should be good.

'Europe we think looks pretty dull at the moment with the economic situation in Europe and particularly Germany looking increasingly dire. The stock markets might take heart from a reduction in interest rates in Europe, but I doubt that will happen until later in the year.

'We are also still very keen on Latin America, although that has been very up and down this year after having had a terrific 1991. There could be terrific opportunities here.

'I would recommend our F&C Smaller Companies investment trust. That has about 45 per cent in the UK and 35 per cent in the US, so if we are right about the US and UK smaller companies both recovering that should do very well.

'If the conventional wisdom about UK smaller companies is wrong and they have a bad year at least you have the protection of the US smaller companies.

'For the brave we would say Latin American Investment Trust. It is looking quite attractive now but it is not a widows and orphans stock.'

(Photographs omitted)

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