Watson's innovation growth IT gears up for first time on back of improved small cap outlook
Brian Watson, manager of the Framlington Innovative Growth investment trust, has geared up for the first time due to his optimism on the prospects for UK smaller companies going forward.
Watson has arranged a bank debt facility of £20m, of which £8m is fixed and £12m is revolving. He has already taken down £8m, as a three-year loan, and while the other £12m has not been utilised, Watson said it will be when he feels the time is right.
Watson said: 'The UK domestic economy is the envy of Europe and the purest way to play this is through smaller companies. Smaller companies is a place to breed excellence in the market and the opportunities there are better now than hitherto. It is still relatively fairly valued and there is the likelihood for more corporate activity.'
The £133m trust, a company launched in 1992, is ranked top quartile on an NAV growth basis over six months, one, three and five years compared with peer smaller companies funds. On share price performance, it is ranked nine out of 35 over one year to 12 March 2002, on a mid-to-mid basis, returning -10.4%, compared with the sector average -20.6%. It has been top quartile over six months, one year, three years and five years.
The trust looks for companies demonstrating long term capital growth, with double-digit earnings growth.
Watson said that while there has been a lot of pressure on a number of smaller companies trusts, which focused on fashion areas when launched, this trust, with its view to investing over three to five years, has produced solid performance in both weak and strong markets.
Watson said: 'We look for good solid growth, fundamentals and management, which creates good solid performance. I want earnings, not the promise of earnings, ideally between 15% and 20% a year. If a company's earnings drops below double-digits, there would have to be a good reason why. If it can be proven that it was just a one-off, that is fine, but if it is more than that then the company will be disposed of.'
The trust contains around 120 holdings in the portfolio and Watson combines bottom-up stockpicking, with a top-down economic overlay. Shareholders in the trust have the right to determine the future of the company at three yearly intervals, in the event of an underachievement in performance targets. In June 2001, shareholders voted to continue the trust and the next continuance vote is in June 2004.
Watson is currently keen on are outsourcing, property and increasingly the media sector. He said that when the economy begins to turn around again, more companies will begin dedicating budgets to advertising again in an area that will see more consolidation.
Watson is still underweight in the technology sector, as he believes it is still in a mess. He said: 'I prefer to buy companies on earnings and too much of the information technology sector does not have this yet. There have been small signs of improvement in the sector, but I am likely to remain underweight until I find something that will be a leader in the sector.'
Watson is also underweight in general retailers, which he said has slightly hurt the trust's performance over the past year, due to the sector's good performance.
However, he said as a long term investor, the trust does not pay a lot of attention to short-term market pick-ups and while the sector has performed well over the past year, it probably will not do as well over the next two to three years.
As well as Watson, the trust also utilises the skills of Roger Whiteoak, head of Framlington's UK smaller companies investment team, Richard Pierson and Ben McCarron, who between them have a combined experience of over 60 years.
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