The UK is favoured for smaller company investment in global equity funds, ahead of the US, Japan and...
The UK is favoured for smaller company investment in global equity funds, ahead of the US, Japan and continental Europe. Although, as small cap performance picks up year to date in the more established markets, caution still abounds due to its exposure to technology companies.
Catherine Stanley, global smaller companies fund manager for Foreign & Colonial, says she favours the UK smaller companies market as it has been a strong performer, outperforming the FTSE All-Share over the year to date.
Over the year to 29 September the FTSE small cap index has returned 27.53%, while the US smaller companies index, the Russell 2000, has returned 37.69%, in sterling terms.
Over the same time period the Japan smaller companies index, the Topix, has fallen 1.39%, in sterling terms. For the year to 29 September the FTSE All-Share has returned 11.09%.
Within F&C's smaller companies investment trust, the UK has a 49.5% weighting, followed by the US at 17.9%, continental Europe with 16.5% exposure, Japan at 12.3% and emerging markets at 3.8%. Stanley says the UK has an extremely developed small cap market making it very attractive, as she prefers to stick to safer, more developed markets.
Michael McPhee, investment trust manager at Baillie Gifford, also favours UK smaller cap companies.
He says in stock selection he is not constrained to any particular small cap market on a geographical basis but believes the UK market holds good opportunities.
Baillie Gifford favours those companies which look best set to grow into the mid to large cap range, McPhee adds.
Yet, within the smaller companies market, Foreign & Colonial is cautious about the tech sector, says Stanley, with the trust currently neutrally weighted in technology.
She says she is looking for non-tech growth opportunities, as the tech sector is too volatile.
Stanley says Foreign & Colonial smaller companies trust has benefited from the recent tech sector market corrections, due to its neutral weighting compared to similar funds in the small cap market.
She says there are some interesting UK tech new issuances that the trust may participate in, adding that she will approach them in an extremely selective fashion.
Stanley says she looks at the fundamentals of a company in order to find high quality growth stocks at cheap valuations with strong management.
She continues: "There are often no quoted comparatives in this market, so it is hard to judge value. We are looking for companies that could become global players in niche markets."
McPhee is similarly cautious of technology in the global small cap market, noting that the group has moved underweight the sector more recently.
McPhee claims there are some undervalued companies in technology small caps but at the moment Baillie Gifford has a very diverse spread of holdings.
On the defensives front, Stanley says she is overweight port services and engineering consultancies, envisaging viable long-term earnings growth. She attributes this to the trend towards outsourcing.
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