A professional investor tells MoneyWeek where he’d put his money now. This week: Peter Ewins, manager of the F&C Global Smaller Companies Fund.
Since May’s market fall, small-cap shares have underperformed as investors switched to larger stocks, seeking safer havens and better liquidity in a nervous market. In recent years, small caps have outperformed significantly, so relative weakness at some point was to be expected.
But there are always opportunities at the level of individual stocks. Some small caps have undoubtedly been sold off too harshly, and good results, combined with positive outlooks, could lead to share prices rebounding.
Weaker UK consumer spending has been a worry for small firms, which tend to be more aligned to the health of the domestic economy. But well-run businesses, such as Omega International (OME), can buck the trend.
This UK-based kitchen maker is doing well thanks to the cost-effectiveness of its modern production facilities, which allow it to provide a speedy service to customers. It also benefits from selling products through a growing list of independent kitchen retailers, rather than trying to corner large groups, such as B&Q, where margins are lower.
Another firm we like is Cohort (CHRT). The firm offers independent consultancy services to military customers, including the MoD and British Aerospace. Cohort specialises in areas such as command and communications systems and assists in planning military training exercises.
The aim is to build Cohort into a much larger business through acquisitions – it has already bought UK systems house MASS Consultants. Much of the management team used to work for armoured vehicle group Alvis, which was bought by General Dynamics. This has strengthened our faith in their expertise and commitment to growing the business.
Not to be confused with Aviva the insurer, Aveva (AVV) provides IT software to firms involved in design and construction of ships, petrochemical refineries and power stations. Of the top 20 global shipbuilders, 80% use its products. Aveva is also benefiting from heavy infrastructure spending in Asia, particularly China, where it has a strong presence.
Limited coverage by analysts can mean some small caps are easily overlooked. Fund manager City of London Investment Group (CLIG) joined the market earlier this year and so far only one broker follows it. The group specialises in managing emerging-market money by investing in closed-end emerging market funds, looking for opportunities where fund prices are at wide discounts to asset values.
Its key products have demonstrated an excellent long-term track record. Given the long-term trend towards investing in emerging markets, we believe the group will show good growth in funds under management over time.
Japan’s stockmarket suffered more than most in May’s sell-off. Smaller stock indices have been particularly weak. But there are signs of a pick-up in consumer spending and we have been encouraged by recent meetings with the firms in our Japan portfolio.
We believe company earnings guidance may prove to have been too conservative. Some great smaller firms with strong fundamentals have been caught in the cross-fire of a general sell-off. One is telecoms service provider Daimei Telecom Engineering (1943), which is set to take advantage of the ramp-up in capital spending currently taking place within the Japanese telecoms industry