small cap specialist taps into trend for asset diversification to break into large cap market
Unicorn Asset Management is looking to take advantage of the growing trend of pension fund trustees diversifying exposure across asset classes to break into the institutional market.
The small cap specialists are in discussions with a number of consultant actuaries about running portfolios for pensions schemes moving to a core and satellite approach.
Peter Walls, director of Unicorn, said the three-year bear market has led to a reaction against the indexation of funds and pension fund trustees are keen to diversify their exposure to both asset classes and fund managers.
'We have been approached by a number of consultant actuaries and are in discussion with them. Many large pension funds want to adopt more of a core and satellite approach, with specialised fund managers running the satellite pools of non-correlated assets,' Walls said.
He stressed this will benefit the smaller end of the market, as the growth of index-tracking and closet indexation has led to larger firms all but ignoring companies with sub-£150m market capitalisation. Walls is bullish on the asset class and believes a number of key indicators are pointing to an imminent recovery for the asset class.
'Small firms are lowly valued and not overly geared with much healthier balance sheets than when we came out of the last recession in 1992. We are also seeing record levels of directors buying their own shares,' he noted.
'The rationale for corporate activity in the small cap area is greater than it has been at any time in our investment careers. Smaller firms that have been able to grow their sales at decent compound rates throughout the cycle are very attractive compared to their larger counterparts.'
He said growth stocks, which traded on a premium for most of the 1990s, are now heavily discounted, while investors' favouring income funds has led to fund managers paying a premium for stable dividends.
This income premium is in danger of creating a new bubble, he said, as many dividend paying stocks do so because they offer little capital growth potential.
'We are moving our funds away from income to a capital growth bias. There is an income premium now, and while income is an important part of returns there is a risk of buying mature businesses going into decline and missing out on capital growth,' he stressed.
Walls said Unicorn is taking a contrarian stance across its portfolios. Besides the preference for growth stocks, it is heavily underweighting consumer facing stocks and property.
While an interest rate spike is unlikely to burst the property bubble, Walls believes the record indebtedness of the consumer, coupled with increased taxation and a lack of wage growth in the private sector, will affect property prices.
'We believe the property market is at the same stage as 1988-1989 when we had a period of stability lasting 15 months followed by a big sell-off. We can envision the market being stable for another year before falling around 20%,' he said.
This perceived unwinding of the credit-led consumer bubble has prompted Unicorn to favour industrial and business services stocks. These sectors have endured three years of recession, Walls noted, and have pared back their operations to cut costs.
This, along with the ongoing depreciation of sterling against the euro, is creating stockpicking opportunities in these beleaguered sectors, which Walls believes will help provide the impetus for recovery.
Cyclical businesses, even those with strong balance sheets, have been so heavily oversold by institutions that Walls said he is able to pick up quality stocks on the cheapest valuations he has ever seen.
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