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%

News
Ross Burden pictured in 2002
people
News
scienceHad asteroid hit earlier or later in history, the creatures might have survived, say scientists
News
President Obama, one of the more enthusiastic users of the fist bump
scienceBumping fists rather than shaking hands could reduce the spread of infectious diseases, it is claimed
Voices
voices
PROMOTED VIDEO
Life and Style
Upright, everything’s all right (to a point): remaining on one’s feet has its health benefits – though in moderation
HealthIf sitting is bad for your health, what happens when you stay on your feet for a whole month?
Arts and Entertainment
Peter Griffin holds forth in The Simpsons Family Guy crossover episode
arts + ents
Sport
Laura Trott with her gold
Commonwealth GamesJust 48 hours earlier cyclist was under the care of a doctor
Arts and Entertainment
Gal Gadot as Wonder Woman
arts + entsFilmmaker posted a picture of Israeli actress Gal Gadot on Twitter
News
Bryan had a bracelet given to him by his late father stolen during the raid
people
Arts and Entertainment
Chris Pratt stars in Guardians of the Galaxy
arts + ents
Arts and Entertainment
Pedro Pascal gives a weird look at the camera in the blooper reel
arts + entsPrince Oberyn nearly sets himself on fire with a flaming torch
News
Danny Nickerson, 6, has received 15,000 cards and presents from well-wishers around the world
newsDanny loves to see his name on paper, so his mother put out a request for cards - it went viral
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
France striker Loic Remy
sportThe QPR striker flew to Boston earlier in the week to complete deal
News
Orville and Keith Harris. He covered up his condition by getting people to read out scripts to him
People
Arts and Entertainment
Zoe Saldana stars in this summer's big hope Guardians of the Galaxy
filmHollywood's summer blockbusters are no longer money-spinners
Arts and Entertainment
O'Shaughnessy pictured at the Unicorn Theatre in London
tvFiona O'Shaughnessy explains where she ends and her strange and wonderful character begins
Life and Style
Workers in Seattle are paid 100 times as much as workers in Bangladesh
fashionSeattle company lets customers create their own clothes, then click 'buy' and wait for delivery
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

Training/Learning and Development Coordinator -London

£28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

Training Programme Manager (Learning and Development)-London

£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

Application Support Analyst / Junior SQL Server DBA

£40000 - £45000 per annum: Ashdown Group: An established professional services...

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

Day In a Page

A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
It's the best of British art... but not all is on display

It's the best of British art... but not all is on display

Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
Critic claims 'I was the inspiration for Blanche DuBois'

Critic claims 'I was the inspiration for Blanche DuBois'

Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
Sometimes it's hard to be a literary novelist

Sometimes it's hard to be a literary novelist

Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

The woman stepping down as chair of the Heritage Lottery Fund is worried