The strong performance by Japanese small caps this year is encouraging fund of fund managers to cont...
The strong performance by Japanese small caps this year is encouraging fund of fund managers to continue buying into this part of the market.
Peter Metcalfe, manager of the Premier Enterprise unit trust of investment trusts, is pursuing this strategy of a small and mid cap bias, as is John Husselbee of Henderson Investors.
So far this year the MSCI World Index Small Cap is up 17% on a dollar basis, whereas in the second and third quarters of last year the index fell by 4.3% and 20% respectively, representative of their overall poor performance in recent years.
Metcalfe says: "Smaller companies usually do well in the first quarter but then are down graded. This year they have maintained their good performance."
Among the trusts he holds are Fleming Mercantile, Foreign & Colonial Smaller Companies and Edinburgh Smaller Companies. He says: "Both the Flemings and Foreign & Colonial trusts invest in the larger small cap stocks, which carry relatively less risk. In the case of Fleming Mercantile it invests in the Mid 250 equities below the FTSE 100 and above the small cap stocks.
"I favour the Edinburgh trust as the manager Alistair Currie is not totally value driven. Managers need to look for growth at a reasonable price as growth is critical in a low inflationary environment."
Another smaller companies trust Premier Enterprise has exposure to is JF Fledgling Japan, which enables him to play smaller companies and have exposure to his other favoured theme, the Japanese market. The growth in Japanese small companies caused the trust to grow from a portfolio exposure of 4.4% in early July to between 6%-7% in August, according to Metcalfe.
He says: "I decided to trim the weighting back slightly to under 5% and use the money to increase the fund's weighting in Japanese large cap stocks principally Fleming Japan. The thinking behind this was that once the big international players realise its time to invest in Japan again they are more likely to invest in stocks at the top end of the market. Since taking some profit in JF Fledgling the outperformance of the trust has continued."
Henderson Investors is also overweight Japanese smaller companies. John Husselbee, fund manager of the Henderson Independent Growth Portfolio unit trust of unit trusts, says: "We have exposure to one of our own funds Henderson Japan Smaller Companies. Smaller companies make up part of the 'new Japan' with some of them concentrated in technology sectors, such as software."
In Europe and the US the only exposure Husselbee has to smaller companies is through more generalist funds and not ones with a specific small cap remit. In the UK the Husselbee is still overweight small caps even though he cut back his exposure in May.
He says: "We kept track of the small companies rally and noticed fund managers were increasing their weighting in the sector. We decided to cut back our exposure to specialist small cap funds in May when there was a short-term peak. We are still overweight as All Companies fund managers are overweight the sector."
Gartmore BWH International is also overweight UK small companies through specialist and All Companies funds. Two specialist funds which the Gartmore unit trust favours are HSBC UK Smaller Companies and Lazard UK Smaller Companies Growth.
Nick Brack, manager of Gartmore BWH International, says: "We were thinking of selling off the holding when the fund's manager Ashton Bradbury left to join HiIl Samuel but we were relieved when David Taylor took over."
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