Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Ed Beal, manager, Dunedin Smaller Companies Investment Trust.
Small companies have returned 10.4% (including dividends) in 2015 so far. That’s attractive in any environment, but compares particularly well to the –2.8% from the FTSE 100. Why the divergence? Resources (mining, oil and gas) stocks, hit hard by falling commodity prices and slowing demand from emerging markets, are less important in the small-company universe than in the large-cap indices. Small companies also tend to be less exposed to emerging markets than their larger brethren.
That said, many of our investments have emerging-market exposure, which we think will be a good thing over the long run – for several years one benefit of smaller companies has been their decreasing reliance on the domestic economy. Lastly, many smaller companies are actually trading respectably. Life is tough for most businesses, but with solid growth in the US and the UK, and a strengthening recovery in Europe, good quality companies are doing OK.
With interest rates set to rise on both sides of the Atlantic, 2016 will see an environment that many market participants are unaccustomed to. However, we believe that, over the long run, a company’s fundamentals are the key determinant of its share price. We have a portfolio of good quality companies that we believe can prosper over time and whose balance sheets are strong enough to withstand periods of uncertainty. Here are three examples.
James Fisher (LSE: FSJ) is a leader in the marine support-services sector. It has very strong positions in a broad range of markets, including ship-to-ship transfer, submarine rescue, fenders, high-end compressors for the offshore oil industry, and coastal tankers. It also serves the nuclear industry (making complex manipulators for remote handling) – a growing market, with several potentially large contracts available over the short and medium-term. There is also solid demand for its highly specialised dive systems. The shares trade on a price/earnings (p/e) ratio of 14, and the strong balance sheet allowed the management to raise the most recent dividend by almost 10%.
Oxford Instruments (LSE: OXIG) provides highly specialised products for the characterisation and determination of matter at the nanoscale (billionths of a metre). It gives exposure to a rapidly growing market, without having to take a view on which areas of technology will eventually win out. Everyone doing research in nanotechnology-related areas will need the associated hardware. While the industry is quite fragmented, the company has a market-leading brand. It has experienced tough trading recently, which has left the shares on a p/e of 12 – attractive for a company that should benefit from long-term structural growth.
Genus (LSE: GNS) is the market leader in sexed semen for the beef and pork markets. As global protein consumption rises, so farms are pushed to industrialise. One of the best ways to increase yield per animal is to use genetics to improve the quality of the herd. Genus looks well set to benefit from this. The company will be subject to the cyclical nature of the agriculture industry, but it has successfully developed a royalty model that insulates it from the swings in the notoriously cyclical pig markets. It also has emerging technology in the provision of single-sex semen and in vitro fertilisation in cattle markets. Either could be very significant opportunities in the medium term. The shares trade on a p/e of 24.