as a result of the bursting of the technology bubble focus of the us smaller companies market has switched firmly onto defensive stocks
The offshore US small-cap sector has experienced turbulence since the late 1990s with the tech bubble leading to a boom for growth-orientated investment and then bursting to open the way for value-orientated funds.
The Merrill Lynch US Small Cap Value Fund has outperformed others in the asset class over the last three years while maintaining relatively low volatility. This is due to its relative value approach to investing, according to Scott Becker, product specialist with Merrill Lynch Investment Management.
The fund looks for opportunities in stocks trading cheaply in comparison to their 10-year history.
'We try to look for companies trading at the lower end of their range for some temporary reason and hopefully we have some degree of margin for safety involved,' says Becker.
Company management is key to the process. It is examined for its ability to recognise the reasons for the slump and deal with it. Another important factor is the other firms a company does business with. If the business is done mainly with other small-cap companies in a difficult market for example, that could be a danger sign ' because those businesses could drastically cut orders or fail entirely.
Global events have created opportunities in the small-cap sector, according to Becker. Contagion from the Asian crisis, the bursting of the tech bubble and 11 September created environments where there were many good buys in the sector, he said.
Since the start of 2000, small-cap fortunes have been improving, according to Becker, out-performing large caps and growing in popularity with investors. There are several possible reasons for this, Merrills believes. First, large caps might have been over-purchased and the balance is now shifting with investors recognising value in small caps.
Second, the small-cap market has historically done well in times of economic recovery. Also, signs of recovery in the US after 11 September might have helped to fuel the small-cap recovery.
The Callander Fund Asset, managed by Stanley Nabi, which is distributed by Cerepfi, Paris, has kept volatility lower than other funds in the sector and produced relatively good returns over the last three years.
The fund is a value-orientated and defensive stocks portfolio. Due to this weighting it suffered in 1998 and 1999 when the tech boom was taking place, but came back strongly when the bubble burst, according to Catherine de Christen, partner and director of Cerepfi.
There are around 60 stocks in the portfolio. Nabi picks small solid companies with market cap of below $2bn and good earnings visibility, with which he keeps in close contact through regular meetings.
The fund's volatility has been kept down by an invest-ment strategy that involves low turnover and conservative stock-picking, said Christen.
The fund aims for long- term capital appreciation in companies with a strong balance sheets, a stable management, a long history of operation, clearly defined business and leadership positions and preferably excess cashflow.
The technology component of the fund is limited to 20%.
The strategy of the fund is to buy and hold stocks regardless of short-term market fluctuations. Specific company development, rather than market price levels, is used to determine buy or sell decisions.
If individual firms maintain their fundamental earnings and business momentum, market declines are viewed as opportunities to increase investment positions.
'The dream is finished ' the bubble with growth stocks is over,' according to Christen.
The market was good for growth stocks during the tech boom from 1998 to 1999, she believes, but the growth stocks' period ended in March 2000.
'The year 2001 has been disastrous for tech stocks,' said Christen. 'People have been so frightened they have returned to defensive stocks.'
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