The small company universe in the US presents investors with a myriad of interesting investment oppo...
The small company universe in the US presents investors with a myriad of interesting investment opportunities partly as a result of the country's strong entrepreneurial culture.
The venture capital industry is very well-established and actively promotes the development of new ventures by the ever-growing army of MBA graduates. With risk-taking perceived to be both a normal and an essential part of the corporate landscape, start-up companies proliferate to a far greater degree than in the UK or Europe.
Many of these are set up to carry out specific roles created by the rapid advance of technology, adding to the already heavy weighting of the technology sector within the Russell 2000 Growth Index, the technology services and electronic technology sectors currently make up over 40% of the index.
Although many of the companies we favour are technology related, there are many exciting growth opportunities elsewhere. One major growth area we have identified is education, and we believe there are two clear themes.
The first is raising the game. Edison Schools, for example, is benefiting from the perception that many US schools need to improve their performance both academically and financially. The company contracts with local school districts and public charter school boards to assume educational and operational responsibility for individual schools, funded according to the number of pupils registered.
It has established itself as a leader in a market worth around $360bn and is consolidating its position with the launch of various new growth initiatives such as large-scale contracts, summer schools and a pilot 'smart' classroom with Apex Learning. As a result, Edison's revenues and earnings are growing at a much faster pace that its competitors.
The provision of post-secondary education is the other key theme and this addresses the need for specialised training to close the gap that has opened up between the existing skills of the workforce and the skill-sets now required, particularly in technology-related fields.
One of the companies we favour in this area is DeVry. The company provides private degree-level education services to school leavers, specialising in developing first-class skills in information technology. DeVry is growing strongly in line with the expanding demand for IT professionals.
Although this is reflected to some extent in its share price performance so far this year, we believe there is potential for more rapid earnings growth than is generally expected, given the high level of demand for the company's courses as revealed by the growing number of applications.
Health technology, a sector that accounts for around 13% of the Russell 2000 Growth Index, is another area of interest within the small cap universe. The recent mapping of the human genome, and with it the possibility of developing new methods of drug treatment, represents a major breakthrough in the field of genetics.
The next crucial step towards realising the full benefits of this tremendous achievement is to identify the individual differences in the genome that cause disease in some but not in others. We have chosen to focus on companies such as Luminex that develop the technology platforms that simplify and speed up this biological testing.
Sales of its platforms to major pharmaceutical laboratories and biomedical research facilities have given Luminex a strong position in both diagnostics and lifesciences.
More importantly, it has recently agreed to collaborate with Orchid to commercialise a rapid throughput system for SNP analysis (single nucleotide polymorphism) -an essential element of the pharmaceutical discovery process. This will be done by using Luminex's open platform LabMap technology, and firmly establishes Luminex as a leading player in drug discovery and genomics.
While the benefits of this technological advance should accrue to companies such as Luminex relatively early in the business cycle, companies involved in the development of new treatments will not tend to benefit in terms of their own earnings capability until somewhat later.
Of these, we believe Genaissance Pharmaceuticals, which develops technologies to improve drug discovery based on the analysis of human genetic variations, exhibits the quality of management and strength of business model to succeed in this competitive and demanding marketplace.
Within the technology sector itself, new telecommunications standards are clearly an important component driving demand, particularly the development of digital subscriber line (DSL). We have identified several interesting growth opportunities within this field, including Virata and Netopia.
Virata's software enables its customers to develop a variety of DSL equipment, including modems, gateways and routers targeted at the voice and high speed data network access market. Netopia is also well positioned in the DSL market. It is continuing to build brand recognition within its peer group and is on the way to becoming the leading supplier of access devices to the small business market.
Another area within information technology which is experiencing rapid growth is the establishment of server farms, warehouse-size buildings housing row upon row of servers.
Their sheer size and complexity mean they are becoming increasingly difficult to manage and companies that design and supply the software required to route the vast quantities of data traffic received by these farms have a bright future. One such company is Resonate, part owned by Reuters.
The success of its recent initial public offering (IPO) indicates the level of interest in companies producing eBusiness applications such as internet traffic management and systems management applications.
We believe the boom in global eBusiness is set to continue and will far outpace the business-to consumer model, providing a favourable back
FCA consultation response
MoneyLens to be edited by former Mail on Sunday journalist Vicki Owen