ira unschuld, manager of us smaller companies fund, sees continued cash flows into a sector in which most institutions are underweight
Schroder US manager Ira Unschuld is predicting small caps will lead the North America equity market recovery.
Unschuld, who runs the group's US Smaller Companies unit trust, said small caps have significantly outperformed large caps over the past five recessions and he expects them to do so again.
He said: 'My guess is that if we continue to come out of recession, smaller companies will lead the way and it will remain a stockpicking environment for the next six to nine months.
'If you get more stock specific in small caps, you can still find companies that have excellent growth prospects and good valuations ' that is P/Es of 15 times to 20 times ' growing at 19% to 20% and better if the economy improves.
'In 1997 to 1998, we saw the outperformance of mega-cap stocks. Although it is going to be very hard for a company like GE to double in size organically over the next three years, some of the smaller companies can do that.
'We focus on companies where business is good and getting better although we are mindful of what we are paying for these future prospects.'
Unschuld holds around 100 stocks in US Smaller Companies and recent additions include ProQuest which provides educational publications, for example digitised versions of newspapers for libraries. He has also built up exposure to book and video game retailer Barnes & Noble.
Unschuld said: 'We have added to existing holdings rather than put in a lot of new stocks. Everything we do tends to be incremental. As we find better names, we will add them to the portfolio and take profits from existing holdings.'
Other holdings in the fund include credit card systems company Global Payments as well as Affiliated Computer Services.
Unschuld added: 'The fourth quarter of 2001 was a good quarter for the equity market as a whole and US smaller companies in particular. After the third quarter the market came back strongly on the back of interest rate cuts and investors shrugged off bad current fundamentals and looked towards better times ahead.
'We were defensive in the fourth quarter which hurt us and we moved towards cyclical names amid signs that the consumer was continuing to spend money.'
Unschuld said factors which could worsen the outlook for US small caps would be if large company profits started growing faster than smaller company profits although he does not see this happening currently. Another negative could be liquidity flows into large caps at the expense of smaller companies.
Unschuld added: 'The flow of funds into US smaller companies funds is very strong. A lot of investors in the US are underweight in this part of the market.'
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