The extreme valuations for small cap tech firms, particularly start-ups, will unwind in the last q...
The extreme valuations for small cap tech firms, particularly start-ups, will unwind in the last quarter leaving many funds badly exposed, according to Capel Cure Sharp's smaller companies fund manager Simon Smith.
Smith has been running the £236.8m frAA-rated CCS UK Smaller Companies Fund since 1991 from CCS' Birmingham office. He believes that technology, media and telecoms, which makes up his largest overweight positions compared to the index, will continue to drive performance, however the market will increasingly demand to see those valuations justified.
Because of this Smith said his strategy remains to invest in the main in companies with current operating profits at sensible values, a combination that he admits has become hard to find.
He has also moved to concentrate his portfolio, which had built up to more than 120 stocks three months ago during the extended bull market. He has reduced the number of positions to around 100.
He is coupling that with taking zero positions in sectors which he views as having little or no growth potential or which have become commoditised such as packaging, household goods, food products and producers, or textile companies. He has no holdings in either insurance companies or mining.
The fund is ranked 22 out of 67 funds over three years to 6 September with offer to bid returns of 108.4% compared to a sector average of 96.7%. It is ranked 33 out of 74 funds on its one year returns of 39% up to the same date compared to a sector average of 45.6%.
Smith's weightings include 18% in technology, 11% in media, and 4% in telecommunications. He has a weighting in IT of 1.8 times the Hoare Govett Smaller Companies Index and two times the index in media.
Smith said: "There are a lot of silly valuations out there in the marketplace and a lot of businesses which are little more than start-ups.
"I have got nothing against technology but I am not willing to pay £400m to £600m for start-ups. In the past quarter they have performed very well but as they begin to have to justify these valuations they will inevitably begin to disappoint."
He said that there are companies with market caps of over £700m with annual sales of less than £0.5m.
"The continued valuations of some of the pure growth businesses are taking too much for granted and many of them will unwind. The market is valuing some of these stocks too highly."
His biggest overweight positions are in electronics, where Smith looks for companies with a technological edge or which are operating in fast-growth market places.
An example of this strategy is First Technology, which designs safety sensors and switches for the automotive industry.
He also believes that there is upside in the aerospace industry and is invested in UMECO which is a tier one supplier for firms like Rolls Royce and is projecting 20% growth over the next 12 months.
His overweighting in the IT sector represents software plays such as Staffware which provides software solutions in the e-procurement and e-banking arena.
He is also overweight in speciality finance, which he sees as a growth area, in which his biggest holding is Springboard venture capital firm.
Top 10 stocks which are Staffware at 4%, UMECO at 3.8%, Incepta at 3.4%, Hit Entertainment at 2%, Springboard at 1.8%, Biogland Pharmaceuticals at 1.8%, Intermed- iate Capital at 1.8%, WSP at 1.7%, Fibrenet at 1.6% and First Tech at 1.6%.
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