Small is wonderful, when the balance is right

<b>Fundamental Facts </b>

Wednesday 06 September 2000 00:00 BST
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Roger Whiteoak has spent most of his career as a fund manager specialising in smaller companies. A graduate in Land Economy from Cambridge, Mr Whiteoak's entry into fund management was carefully planned. "I got interested in the stock market when I was 16 and did work experience with Rothschild. And before I went to university, I did three months in New York working at Pru-Bache on the broking side."

Roger Whiteoak has spent most of his career as a fund manager specialising in smaller companies. A graduate in Land Economy from Cambridge, Mr Whiteoak's entry into fund management was carefully planned. "I got interested in the stock market when I was 16 and did work experience with Rothschild. And before I went to university, I did three months in New York working at Pru-Bache on the broking side."

When he started he had no particular plan to specialise in smaller companies. "I was mainly interested in finding companies that made money, but by covering small-caps you are often learning about sectors of industry you are not normally exposed to, and meeting interesting and successful people.

"I enjoy looking at smaller companies because you can have more direct contact with their managements and you have more opportunity to put together a focused investment strategy. Everyone is covering larger companies, so there is less opportunity to uncover your own ideas."

He has been running the Rathbone Smaller Companies Fund for four and a half years. "I joined Rathbone in January 1996. I had been at Duncan Lawrie, a small private bank in the West End of London, running ethical portfolios and researching smaller companies.

"What differentiates the Rathbone fund from its competitors is that we have stuck to a disciplined approach in terms of the number of stocks and the sector spread we hold and we have kept the volatility down. We have a diverse portfolio of more than 100 stocks and we're committed to keeping a sector balance in the fund.

"It is meant to invest predominantly in companies below £250m market cap, although its remit is wide. We invest in smaller companies when we are convinced they are going to become bigger, and we do not sell just because a company is above £250m, if its newsflow and growth prospects are good. We aim to have long-term holdings, rather than taking advantage of short-term anomalies."

Like many smaller-company portfolios, the fund benefited from the dramatic outperformance of the technology-based sectors, but the balanced approach helped it avoid some of the volatility suffered by its peers. "We never had more than 25 to 30 per cent in technology stocks, because we thought the valuations were too high and we didn't want to take that level of risk. The downside was that we didn't perform as well as those funds more heavily exposed to technology when they were going up, but the upside is that we have fared much better than those funds this year."

Indeed, the fund still has 21 per cent of its portfolio in information technology stocks, but the largest element of the portfolio is in what are called cyclical services.

"If you look at the portfolio relative to the market we are slightly underweight in financials and overweight in information technology, but otherwise we are in line with market weightings.

"We are taking aggressive bets in areas we like, which means high-value-added companies or those with strong domestic earnings, in sectors like building & construction (9.7 per cent of the portfolio), retail (5.4) and support services (7.4). We think the UK economy has sound prospects, so we like areas where UK companies are prominent globally - media, aerospace, biotech, pharmaceuticals, outsourcing.

"Our approach is pragmatic. We look at each sector, trying to value it accurately and see where growth is coming from. We concentrate on the 'positive' companies, those which show global competitiveness. You have to ask yourself why a global investor would invest in UK small caps and the reason is that you can get some of the best companies in the most interesting sectors.

"We have a dim view of anything that is low-value-added, engineering or print and packaging. What is interesting about UK smaller companies at present is that everybody is looking at the high-growth areas, information technology, biotech, media and so on, and the importance of the more traditional sectors is reducing - textiles and food manufacturing, which used to make up a large part of the index. In particular, we have been buying biotech recently, because we think the newsflow will be good for a lot of these companies."

Mr Whiteoak also sees good current opportunities in some more traditional sectors. "We have also been redistributing some of the profits from our tech stocks into property and retailing. Like a lot of investors, we had gone through the process of thinking that the growth of e-commerce was going to have an adverse effect on these sectors, but, in fact, property should benefit from it because you will need more capacity as business grows."

The fund's largest current holding is construction group Amec (1.91 per cent), following recent buying. The fund has also increased its exposure to Balfour Beatty and property companies City North and Asda Properties, while selling its holdings in several tech stocks, including Royal Blue, Triad Group, Zen Research, ISoft and Turbo Genset.

"We are also great believers that niche retailers will benefit tremendously from e-commerce because they have the skills in sourcing and marketing and branding and so on that ecommerce needs to be successful. Our view is that the internet leverages existing skill bases so, for example, a retailer with a strong franchise can actually sell to more people much more effectively."

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