The Analyst: Small really is beautiful in Cazenove’s cap boutique

 

If you cast your mind back to the beginning of 2012 the investment world was full of worry.

Events in Europe suggested a breakup was a clear possibility, data from China indicated a “hard landing” from its previously stellar growth rate, a possible Iranian threat was looming and the American elections and so-called “fiscal cliff” were a source of uncertainty. Don’t get me wrong, it hasn’t all changed for the better overnight, but things are starting to look up.

In Europe, the can has been kicked more firmly down the road. Meanwhile, Chinese data are beginning to look more positive, and areas which have been performing well this year might surprise a few people.

Given the macroeconomic concerns many people thought large, defensive stocks would be the place to be. Yet it turns out that many have been lacklustre. In the case of pharmaceuticals such as GlaxoSmithKline, they have lost most of the gains made in 2011.

Instead, among the best performers are funds investing in small and medium-sized companies, one exceptional performer being Cazenove UK Smaller Companies run by Paul Marriage, which is up around 32 per cent since the beginning of the year.

What I like about this fund is that it is a genuine smaller-company portfolio, not a mid-cap fund in disguise.  It has about 10 per cent in “microcaps”, companies under £50m in size, 28 per cent in £50m-£100m stocks and 32 per cent in firms of between £100m and £250m, with the balance in stocks over £250m.

Mr Marriage observes that microcaps are at present the laggards when it comes to share-price performance as there is little interest from fund managers. Interestingly, it is high net-worth private investors that are more active in this area.

Mr Marriage is aided by John Warren, the fund’s deputy manager, whom he believes is especially good at timing buys and sells.

It is extremely important for fund managers to have someone they can rely on when out of the office.

Mr Marriage is satisfied that lines of communications are short and that decisions can be made quickly and efficiently. The pair do not waste time debating the economic climate but spend the majority of time meeting company management.

Time and again I hear smaller company managers feel the quality of the management is the most important ingredient they look for, and the meetings they have are extremely helpful in this regard. There are no fancy in-house proprietary systems. It’s a fund where good old-fashioned shoe leather is used to find out what makes companies tick.

Despite the strong run this year the Paul Marriage is still finding plenty of opportunities: companies such as Scapa, an adhesive tape manufacturer; Emis, which develops and supplies software to GP surgeries; Avon Rubber, whose products include gasmasks and tubing for dairies; and Xaar, a supplier of industrial inkjet printheads.

None of these areas seems particularly exciting, which is perhaps why they have been overlooked.

Energy and mining, areas which many investors do find exciting, are absent from the portfolio. Mr Marriage feels he can offer little added value here as share prices are often driven by macroeconomic factors and commodity prices more than anything else.

The excellent performance of this fund, and the sector as a whole, is perhaps indicative of the changing world of small caps. Thirty or 40 years ago they were much more closely tied to the UK economy. Today, half of company profits across Mr Marriage’s portfolio are from overseas.

Although Mr Marriage sees the mid-cap index as being a little overpriced, he still thinks there is plenty of value in smaller companies and feels increased merger and acquisition activity could benefit a number of his holdings.

Small-cap shares can be exceptionally volatile but for those investing for the long term, I believe it should continue to be a worthwhile area to have exposure to. It tends to be under-researched – meaning talented fund managers who really do their homework can show a clean pair of heels to passively managed funds.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Scottish Power was found to have unacceptably long call waiting times

Scottish Power hit with sales ban by regulator

The company was found to have unacceptably long call waiting times

This phoenix rose from the stage at the London Olympics. The insurer grew out of zombie life insurance funds

Phoenix Life: Chance of a refund for overcharged policyholders has risen

A retired adviser got his money back from the insurer after claiming he had been overcharged. Thousands of others may have a strong case
Expect a new wave of fishing expeditions by fraudsters now we can invest our life savings

Cold callers and your pension: watch out for dangerous boiler room scams

Sean O'Grady received a cold call last week that was much more sinister than normal. Yes, someone wants to get their hands on his pension...

Fuel poverty could claim 100,000 lives over next 15 years, warns energy charity

The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter

MPs call for Equitable Life policyholders to be paid £2.8bn owed by government

Hundreds of thousands of people's policies were hit when the mutual insurer almost collapsed at the turn of the century

The elderly woman's family discovered the mistake

DWP criticised after it left a pensioner £26,000 worse off

The Department for Work and Pensions has been slammed after a series of cock-ups left an elderly pensioner £26,000 worse off.

The FCA has today issued a consultation paper on its plans to tighten up consumer credit rules to give consumers greater protection on guarantor loans and in other areas

Payday loan companies must publish their rates, says CMA

A 20-month investigation concluded that a lack of price competition between lenders has led to higher costs for borrowers

Vulnerable consumers are defined as those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the old

Financial companies are not meeting the needs of vulnerable consumers, says City Watchdog

The Financial Conduct Authority said the industry needs to start thinking about solutions to these challenges

The FTSE 100 is inching closer to its record high but can it maintain these levels?

In 1999 stock markets quickly tumbled, losing many a fortune in the process

Tax-free savings: Freedom dawns for the junior savers caught in low-income accounts

The parents of six million children stuck with low-interest saving accounts worth more than £5bn will be able to move the cash from this April. But what are their options? Samantha Downes reports

How much lower will mortgage rates go?

Another day, another cut. As lenders compete to offer the cheapest deals, Simon Read asks if borrowers should jump in now or wait for further falls

Are bills ruining your family life? Try the lover's guide to coping with debt...

If you're in the red and can't find a way out, it's time to get some help. Neasa MacErlean hears that relationships will suffer unless you are open with your partner, but there are organisations that will put you on the right track and get you talking

How to complain: From retailers to energy suppliers, it's easier than you think

When companies let us down, millions of us just take it on the chin. Simon Read shows how to make your voice heard
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

    Recruitment Genius: Customer Relations Officer

    £13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Recruitment Genius: Evening Administrator

    £8 per hour: Recruitment Genius: This Pension Specialist was established early...

    Guru Careers: Executive Assistant / PA

    £30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

    Day In a Page

    Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

    Homeless Veterans campaign

    Donations hit record-breaking £1m target after huge gift from Lloyds Bank
    Flight MH370 a year on: Lost without a trace – but the search goes on

    Lost without a trace

    But, a year on, the search continues for Flight MH370
    Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

    Germany's spy HQ springs a leak

    Thieves break into new €1.5bn complex... to steal taps
    International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

    Whirlwind wit of Simone de Beauvoir

    Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
    Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

    Confessions of a planespotter

    With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
    Russia's gulag museum 'makes no mention' of Stalin's atrocities

    Russia's gulag museum

    Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
    The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

    The big fresh food con

    Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
    Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

    Virginia Ironside was my landlady

    Tim Willis reveals what it's like to live with an agony aunt on call 24/7
    Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

    Paris Fashion Week 2015

    The wit and wisdom of Manish Arora's exercise in high camp
    8 best workout DVDs

    8 best workout DVDs

    If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
    Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

    Paul Scholes column

    I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
    Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

    From the Azteca to Vicarage Road with a million followers

    Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
    Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

    Khan ready to meet winner of Mayweather v Pacquiao

    The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable