Higher returns by smaller companies funds look harder to achieve as the new economy drivers of that ...
Higher returns by smaller companies funds look harder to achieve as the new economy drivers of that growth start to fall back.
Last week's wobble by the Nasdaq had a knock on effect on the tech, media and telecom stocks in the UK with many small caps falling by up to 30% from their recent highs.
Alistair Currie of Edinburgh Fund Managers and Frank Manduca of Gartmore are both UK small cap managers who will run the forthcoming technology unit trusts for their respective groups.
Both agree the fall in new economy stocks was inevitable and argue the sector should begin to outperform again. They also agree it is going to be harder for small cap managers to achieve high returns by getting sector rotation correct.
Currie says: "This will be the case both in TMT and in less fashionable sectors like retail, building and construction, chemicals and distributors."
Manduca says fund managers will have to become a lot more selective in stock selection, but notes there is no real evidence that fund managers are selling TMT to buy old economy stocks.
Currie does not expect to trim technology from its current position of 50% of the Edinburgh UK smaller companies unit trust, nor media from accounting for 20% of the fund. Likewise, Manduca expects to maintain a 50% weighting in tech, media and telecoms in his smaller companies fund.
Manduca adds: "This shakeout will show that many companies will not bounce back, but this will not be across the board. The quality companies will survive while those which had been riding on the dot.com name alone will not."
Currie says among the out-of-favour sectors, the companies that will be best placed to perform will be those which embrace new technology to cut costs and improve service.
He adds: "For a long time we have looked at how companies are embracing technology in their business.
"We are positive on stocks that have web sites whereby people can place their orders, and at a business to business level, where they can for example order supplies and tender out contracts."
Currie says while many new technology issues will continue to come on stream the current technology shakeout should lead to a better quality compared to some of the recent flotations.
Manduca plans to keep looking for companies which are likely to have scope for an upside earnings surprise, both within the TMT sector and among the old economy stocks.
Among technology stocks Manduca owns are the Torex Group, an emerging company in retail management systems, with clients like WH Smith.
Among non-tech stocks Manduca has a holding in Holmes Place, a health club operator. He sees this continuing to profit in line with the increase in demand for health services.
Currie recently bought Mowlem, a building and construction company that is also involved in support services. This company is expected by the market to grow its earnings at around 15% per year, but is trading on PERs of only six times next forecast earnings.
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