Investment: The Fund Manager - The A to B of choosing a profitable portfolio

THE INVESTMENT story of 1999 has been, to a large extent, one of smaller companies catching up after underperforming the blue chips for years. This trend has, naturally, benefited those funds concentrating on small-cap portfolios, one of the most highly rated of which is also one of the longest established - Schroder UK Smaller Companies.

The fund is run by Andrew Brough, who developed an interest in investment early. He says: "I have played the market since I was 16, and I've been investing on my own account since. I read economics at Manchester then was an accountant with Price Waterhouse for four and a half years. I joined Schroders as an analyst in 1987, and started heading the smaller companies team 10 years ago."

For that time, he has run an institutional smaller companies fund, taking over responsibility for the retail unit trusts in 1995. He says: "We are looking for companies with a clear competitive advantage which can provide above-average growth over the medium term.

"We try to avoid companies which will probably remain small because they have no competitive advantage or those which have become small because they are operating in declining industries or because they are uncompetitive and badly managed. We pay particular attention to the quality of management.

"The key to our success has been working as a team. There are thousands of small-cap stocks and one person cannot cover them all effectively. Smaller companies continue to be an under-researched area of the market, and this provides good opportunities for fund managers to exploit undervalued shares."

Although Mr Brough is "manager" of the trust, the day-to-day work is shared with Jeremy Smith, a management accountant who has been with Schroders since 1992, and Rosemary Banyard, who started as a private client portfolio manager and equity analyst with James Capel and joined Schroders in November 1997.

"We adopt a very simple ABC strategy," says Mr Brough. "If you imagine a triangle, then on the left side of it are all the `A' stocks. These are companies in a secular growth trend, which means they are in new industries or fast-growing sectors of the economy.

"On the right side are the `C' shares, which are those in secular decline, industries where sales and margins are shrinking, such as textiles or food producers, which have no pricing power. In the middle are the `B' stocks, companies in mature industries with high market share.

The `A' stocks are of most interest to the Schroder team. "Our skill is in getting into the `A' stocks early and getting out before they go ex-growth. We will look at any stock in the FTSE Small Cap Index, but we are heavily overweight in the `A' sectors, information technology, support services or pharmaceuticals, and underweight in the areas in sector decline, such as textiles, property or food producers."

In the portfolio, some sectors included within the FTSE Small Cap Index are not represented. There is no exposure to non-cyclical service companies or utilities and less than 1 per cent in resources companies, three sector groupings make up 32 per cent of the index. The fund is heavily underweight in financials (10.4 per cent compared to an index weighting of 25.5 per cent).

Conversely, the fund is heavily overweight in cyclical service companies (just under 40 per cent compared with an index weighting of 15 per cent) and also has significantly higher proportions of stocks in basic industries and general industries than the index. This is also largely reflected in the fund's largest holdings - Photo-Me International (media & photography) at 3.03 per cent of the portfolio, Trafficmaster (transport) 2.37 per cent, Goldshield Group (pharmaceuticals) 2.32 per cent, Whatman (engineering & machinery) 1.92 per cent and Helphire Group (speciality & other finance) 1.82 per cent. Mr Brough says: "Some holdings delivered excellent long- term growth and are still in the portfolio after several years - Photo- Me is a good example. The basis of our success over the past five years was setting ourselves the target of outperforming the Small Cap Index, and the All Share. Now we are going to take that philosophy on to the mid-cap team."

Schroders is launching a UK Mid 250, to be run by a team led by Mr Brough, which will apply a similar philosophy to a portfolio of mid-cap stocks. The most successful smaller companies tend to become mid-caps sooner rather than later - Photo-Me International and Trafficmaster, for example, are already well-established within the FTSE 250 Index and both have shown exceptional performance this year.

Mr Brough says: "Medium-sized companies, just like smaller stocks, offer investors exposure to some of the most dynamic and fastest growing companies in the UK. Medium- sized companies are also surprisingly under-researched. Most investment analysts focus on the largest FTSE 100 companies, even though the FTSE 250 represents 15 per cent of the market by value.

"Photo-Me and Trafficmaster may be followed by two analysts but Glaxo Wellcome or SmithKline Beecham may hire a hall for their results meetings so all the analysts and investment specialists who follow them can attend. As a result, many opportunities provided FTSE 250 companies may be missed. The situation is even more pronounced among the small caps.

Fundamental Facts

Fund Manager: Andrew Brough

Age: 39

Fund: Schroder UK Smaller Companies

Size of Fund: pounds 310.11m

Fund Launched: 23/05/1979

Manager of Fund: Since 1995

Current Yield: 0.41%

Initial Charge: 5.25%

(Investors may buy at significantly lower cost via a discount broker)

Annual Charge: 1.50%

Current Bid/Offer Spread: 6.25%

Minimum Investment: pounds 1,000 (subsequently pounds 500)

Min Monthly Saving: pounds 50

Standard & Poors' Micropal Rating (maximum KKKKK): KKKKK

Fund performance (to 1 October 1999):

One Year 31.21%

Two Years 31.87%

Three Years 47.88%

Five Years 136.33%

Seven Years 262.44%

Ten Years 179.93%

Start your day with The Independent, sign up for daily news emails
News
Ben Little, right, is a Labour supporter while Jonathan Rogers supports the Green Party
general election 2015
News
The 91st Hakone Ekiden Qualifier at Showa Kinen Park, Tokyo, 2014
news
Life and Style
Former helicopter pilot Major Tim Peake will become the first UK astronaut in space for over 20 years
food + drinkNothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Sport
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
football
Life and Style
health
Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
Life and Style
Buyers of secondhand cars are searching out shades last seen in cop show ‘The Sweeney’
motoringFlares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own