The smaller companies universe is increasingly being seen as an incubator for growth stocks rather t...
The smaller companies universe is increasingly being seen as an incubator for growth stocks rather than a proxy for manufacture and retail.
There has been an increasing flow of new technology into the sector at the same time as mergers, management buy-outs and purchases have removed many old world stocks such as builders, retailers and smaller manufacturers.
Richard Penny, fund manager of M&G's newly launched Innovator Fund, says the sector has become "a cheap and early way of buying the leading technology stocks of tomorrow."
Increasingly, he says, the small cap universe is populated with technology start-ups which offer spectacular opportunities. In 1999, shares in 17 UK small-cap companies rose 1,000%, Penny adds.
Richard Rae, head of small cap research at ABN Amro, says the changes are apparent in sector weightings, but warns that the figures do not tell the whole story.
It is difficult to compare sector weightings now with five years ago as sector definitions have changed so markedly, he says. The flow of new IPOs is almost exclusively technology-based, Rae adds.
On 1 January 1999 the Hoare Govett Smaller Companies Index, which defines small cap as the bottom 10% of the UK stock market by market cap, had 4.65% in IT, 0.23% in telecommunications and 5.92% in media. At the end of the year on 31 December, 1999 these had grown to 8.87%, 0.93% and 8.78% respectively.
The weightings have not increased more dramatically because the best performers are quickly promoted into larger indices. That, Rae says, is seen in sector re-weightings in January which saw IT drop to 7.48%, telecommunications to just 0.44% and media to 6.27%.
He adds that new issues take a year to be included in most indices, a factor which has made it easier for UK smaller companies sector fund managers to outperform the index as IPOs last year performed very well.
Penny says that prior to 1999, there was a period of five or six years in which small cap managers had struggled, but says: "Small is beautiful again. It is driven by new technology and incentivised cultures. The UK is a leading player because it has an extremely strong research base and defence industry, and if you buy the right technology early and stick with it you will buy massive capital gains."
He believes the UK is at the leading edge of growth technologies such as mobile telecoms, electronic data transfer, video on demand, the internet, and biotechnology. He points out that Oxford and Cambridge Universities spawned Oxford Asymmetry, Oxford Glyco Sciences, Cambridge Silicon Radio, ARM and Autonomy.
The view of the UK small cap sector as a growth universe is something that Andy Crossley, head of UK smaller companies at Invesco, believes will take time to be accepted.
He said: "Small manufacturers, house builders, the smaller retail companies have either MBOed or have been purchased by overseas or larger companies and the valuations of those that still exist have shrunk to a very small part of the universe."
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