For a fund manager, Jenny Jones is unusually realistic. Due partly to the strong dollar, “the next three quarters are going to prove a real headwind for stocks”, says the manager of the Schroders US Smaller Companies fund.
Luckily, while that will make American exports pricier, it will affect large caps more than the small firms in her portfolio. The small cap Russell 2000 index is only 20% dependent on overseas earnings, compared to 40% for the S&P 500. And with small caps trading on an average trailing p/e of 17.8, against a 30-year average of 22.7, Jones sees opportunities.
Ranked in the top 100 of the 7,000 fund managers tracked by the independent research firm TRS, Jones splits her portfolio into three areas. She invests 50%-60% in ‘mispriced growth’ stocks – firms showing solid sales and profit growth of 10% and 15% respectively. One example is Ross Stores, a US discount clothing operator. Ross Stores is gaining ground as consumers trade down to cheaper products.
Under 20% of the fund can be invested in turnarounds, but given that the economy isn’t expected to recover before 2010, Jones prefers steady stocks, the third component of her portfolio. These are predictable, high-quality companies with consistent results and profit growth of between 8% and 12%. An example is WestAmerica Bancorp, a bank that spurned the sub-prime mortgage sector. It now boasts high reserves, which it can use to buy up failed community banks.
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Schroeders US Smaller Companies top ten holdings
| Name of holding | % of assets |
| Reinsurance Group of America | 2.20 |
| PSS World Medical Inc | 2.10 |
| Scientific Games Corp | 2.00 |
| KV Pharmaceutical Co | 2.00 |
| GEO Group Inc (THE) | 1.90 |
| Waste Connections Inc | 1.80 |
| F5 Network Inc | 1.40 |
| Syniverse Holdings Inc | 1.40 |
| Argo Group Ltd | 1.40 |
| FEI Co | 1.40 |