Andy Crossley, fund manager of Invesco Perpetual UK Smaller Companies tells MoneyWeek where he’d put his money now.
One of the great things about being a UK smaller companies fund manager is that my universe of stocks is so vast and varied. There are over 900 stocks on Aim and almost as many on the full list. My portfolio ranges from Pennon, a water utility worth more than £1bn, to Milestone, a tiny local tri-media (that is, radio, newspapers and local television) firm.
Given the range of potential investments, it is hardly surprising that there are many which, in my view, will make good returns for shareholders, despite my nervousness about the outlook for consumer spending. (Since consumer spending accounts for about 70% of UK GDP, any loss of confidence will be bad news for the stockmarket.)
One of my favourite stocks is Monterrico Metals, which has copper deposits in Peru. It is worth in excess of £7 per share. The firm recently appointed HSBC as corporate finance adviser, essentially to sell the business. More to the point, the major mining groups are earmarking huge sums for acquisitions. On 18 August, for example, BHP Billiton announced that it was setting aside $2.9bn for such purposes.
Another favourite is Star Energy Group. It has sewn up the main depleted onshore gas fields, and is turning them into huge gas-storage facilities. With the UK swinging from being self-sufficient in natural gas to becoming a major gas importer, these assets can only become much more valuable over the years.
I also like Games Workshop Group, which dominates the market for table-top fantasy war games. This is a business with exceptionally high margins, generating lots of cash, and it has grown consistently. The firm has one of the most sustainable competitive advantages I have ever seen. It beats gilts.
Nonetheless, my favourite investment at the moment is not an individual company share, but a collective investment, specifically the Invesco Perpetual Aim VCT – a venture capital trust sponsored by Noble & Company Ltd and managed by me. The main attraction is the tax breaks.
Chancellor Gordon Brown, who is not known for his lack of self-belief in his ability to micro-manage the British economy, has effectively bribed anyone who pays tax in the UK to invest in VCTs in this and the next tax year.
In effect, the rules allow anyone who pays tax in the UK to get back up to 40% of their investment (up to the amount they have paid, or will pay). You only have to hold the VCT shares for three years and you can sell them without losing that 40% tax benefit. Everything else being equal, that equates to an annual return of 8.3%.
Now, we believe we could do a lot better than the “everything else being equal” scenario, and hope to generate good returns from our investments. In fact, our current aim is to be able to generate sufficient realised capital gains to pay out 5p per share per year (VCTs can pay out realised capital gains and can pay them out tax free), which would equate to a gross yield of 12%-plus for a higher-rate taxpayer. So, whatever the appeal of so many UK small companies, my cash (and yours, via the tax refund!) is going into the Invesco Perpetual Aim VCT.