manager richard plackett to increase focus of merrill lynch uk smaller companies fund
Richard Plackett is looking to increase the focus of the £43m Merrill Lynch UK Smaller Companies fund over the coming months.
The fund currently holds about 120 stocks, which Plackett will reduce to 100. However, given the existing lack of liquidity in the small cap market, selling out of old holdings and buying into new ones might take several months, he noted.
Plackett is cautiously optimistic on the asset class, which is trading on a significant discount to the FTSE 100.
The benchmark Hoare Govett Smaller Companies Index is currently trading on a P/E of 12 times, against 15 times for blue chips.
Plackett inherited the portfolio, along with four similar institutional mandates, from former manager Habib Annous on joining the group at the end of last year.
Given the strong performance of the fund over the past three years, which has seen it ranked 14 out of 64 peers over the 36 months to 27 January, Plackett has not felt the need to make wholesale changes to the portfolio. Over the same period, the fund posted a return of -35%, compared to a sector average return of -46.7%, on an offer-to-bid basis.
Over the 12 months to 27 January, the fund returned -34% against a sector average of -32.3%, to rank 44 in a field of 69.
'The fund has obviously been performing well over the past few years, so it is not as if I am coming in to turn the portfolio around,' Plackett said. 'Over time, I will try to increase the focus of the portfolio and make changes to bring the fund more into my own style.'
Before joining Merrill Lynch, Plackett ran money at M&G, where he managed the group's smaller companies fund between 1997 and 1999 before switching to the M&G Dividend fund from 1999 to 2002.
While his experience of investing for income has stood him in good stead given the current market climate, Plackett insisted the disciplines driving the running of both the M&G Dividend fund and Merrill Lynch UK Smaller Companies fund are largely congruent.
'The funds were and are both bottom-up stock selection-driven vehicles and, while dividends have been a strong part of returns in all markets, it is always more important to look at a company's underlying cash generation and not invest purely for yield's sake,' he said.
Besides focusing on cash generation, Plackett places great emphasis on smaller companies' management teams and market position.
'We look for a strong management team with a proven track record,' he said. 'We believe people can make more of a difference within a smaller company.
'We also look for companies with a strong, defensible market position and real pricing power. It is very important to seek out companies with cash that can fund growth and we try to avoid concept stocks where profitability is three to four years out.'
Like his predecessor, Plackett will avoid large-scale sector or stock bets, preferring to run with a diversified portfolio of profitable stocks bought on a medium to long-term view.
His favourite holdings at present include nursing home property group NHP and oil services stock Abbot Group.
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