Smaller companies have been struggling of late. The average fund in the Standard & Poor's smaller co...
Smaller companies have been struggling of late. The average fund in the Standard & Poor's smaller companies sector fell by 7.5% in the six months to 1 June 2001 while the FTSE 100 fell by only 4.4% in the same period.
But David Lis, manager of the Norwich Union UK Growth fund, argues that performance has not been so bad over a longer period, especially when compared to what has been happening in the technology sector.
Phil Harris, manager of the smaller companies fund at Credit Suisse, argues that poor recent performance was because small companies are more closely related to changes in GDP. He says: 'They have been hit by the slowdown in the UK and Europe and there have been a number of profit warnings across all sectors.'
One such company is Lavendon, which produces powered access equipment for construction sites that can be used instead of scaffolding. The company was in a particularly vulnerable position because of its high exposure in Germany where it has recently set up a number of operations. It has been hit by the slowdown in the country, which has been quick to affect the economy as a whole.
Harris maintains that a stockpicking approach is essential at the moment as pain is dispersed across many sectors. However, two sectors that have been performing relatively well, he says, are construction and retail.
Harris argues low unemployment and rising earnings mean people are not burdened with debt and are happy to continue spending money. He sees house construction companies and those involved in private finance initiative projects as having relatively good prospects in the medium term, but says, these sectors may experience some difficulty over a longer period.
Software is now one of the biggest sectors in the smaller companies universe, making up 11.3% of the FTSE Small Cap index in May. However, the bearish state of the market means Harris generally avoids these stocks and holds shares in more defensive companies.
He says: 'I have been very selective in sectors like media and software because I think there is a lot more bad news to come. People have been too early in calling a turn in the market.' This cautious approach sees the fund holding 5% in cash, a high level for Harris.
Lis also sees a tough environment for tech-related stocks. He says: 'Companies based largely on a hope valuation, mainly tech-related stocks, have been hit because the market wants to see visibility of earnings.'
Harris is more happy to invest in companies that are isolated or sheltered from the cycle of the economy. His top stock is Tenon Group, a company that buys accountancy firms and takes out the consultancy arms. This has allowed it to build up a nationwide network and exploit a fragmented market, he says.
Another company that is not too affected by the vagaries of the market is Health Clinic, according to Harris. This company has rolled out a number of clinics across the country and has diversified into areas like dentistry so it is not too tied to the higher end of the market.
Harris says: 'In the current climate, it is important to take a controlled micro approach to finding stocks, rather than looking at the broader macro situation.'
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