As the technology boom continues small cap stocks are benefiting, helped by their low valuations rel...
As the technology boom continues small cap stocks are benefiting, helped by their low valuations relative to large caps.
Jimmy Burns, fund manager at Stewart Ivory, says 1999 was the first time in six years when smaller companies outperformed large caps.
To 31 December, the HSBC James Capel Smaller European (ex UK) index was up 19.7% in sterling terms, against the FT Europe (ex UK) index which was up by 17.8% on the same currency basis.
In January the FT Europe (ex UK) index contracted by 7.5% while the HSBC James Capel Small Cap index fell by just 1%. Burns is confident that the small cap market in Europe still has further strong momentum.
He says: "The small cap market still has further to go if interest rates in Europe remain benign. If rates do rise this will be a major negative."
The main reason for Burns' confidence is the upwards review of earnings forecasts, a function of strong growth.
He says there are new exciting companies entering the market, particularly in France and Germany, mostly in the biotech and technology sectors.
He adds: "There are not so many companies run by big corporations or small families. Rather the smaller companies of today are run by younger enthusiastic management teams who understand the importance of shareholder value.
"The increasing number of cross-border takeovers, and the establishment of a number of venture capital funds are also giving the sector a boost."
Burns warns however that some tech firms are overpriced.
Francesco Conte, fund manager at Flemings, says that until recently smaller companies in Europe were at the mercy of larger companies. Now however with the new media and technology companies, small caps are becoming much more the masters of their own destiny.
Conte is most positive on software companies and new media.
He is more cautious about business-to-consumer net companies and thinks these will take longer to mature than expected, a trend apparent in the US.
He says one of the main negatives facing the sector is its sensitivity to Nasdaq. If there is a correction on Nasdaq, this will be reflected in Europe.
Conte says: "We are therefore focusing on technology stocks with a credible business plan, rather than just because the sector overall has potential."
Aylin Uckunkaya, fund manager at Colonial First State, runs a concentrated portfolio of around 50 stocks. Although there is bias towards larger companies, she aims to capture select growth opportunities among small caps.
She says: "We focus on niche growth companies in the IT sector and for many of these, the sky is the limit for growth."
Some of the small companies in which Colonial European Growth Fund is invested include Articon & Pixelpark in Germany and Norman Data & Opticom in Norway.
Uckunkaya says the negatives sides of investing in small caps are lower liquidity and the lack of research coverage.
She says: "We capitalise on this by meeting managements and making our own assessments. This can lead to investing in a company at the start of its growth phase, ahead of the competition."
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