Switching portfolio holdings away from "hopeful" business models towards those with track records of providing growth and yields may be the way to ride out the rising interest rate cycle, according to one smaller companies fund manager.
Stephen Grant, managing the Ivory & Sime UK Smaller Companies investment trust, says rising rates typically augur a flight from the sector as a whole, but he believes there are enough good quality companies to ensure ongoing gains.
His fund earlier this year switched out of some holdings termed “hope companies” into others with a more solid outlook for 2004, precisely because of forecast rises in interest rates.
With forecasts of up to three interest rates increases this year Grant says the recycling of money was necessary to protect the value of the portfolio.
”We’ve gone from growth-at-any-price to growth-at-reasonable-price,” Grant says.
A problem for all managers of smaller companies funds is the “sentiment impact” interest rate increases cause, he adds.
Investors react by moving out of the smaller companies sector in fear of particularly large share price falls, which in turn forces fund mangers to take a closer look at firms business plans to ensure they “will deliver and won’t be derailed by sentiment”.
An associated problem for Grant and other managers is proof of the solidity of smaller companies in the face of rising rates will not become apparent until company results are reported later this year or early next year.
Grant believes it could take until the fourth quarter this year until people see the evidence and start coming back to the sector, implying that “the jury is still out”.
However, those who do leave the sector will miss out on a great number of good companies, he adds.
These include: Topps Tiles, Thorntons, Spirent and Anite, Civica and Torex Retail (the point-of-sale technology provider spun out of the iSoft acquisition of Torex).
Another issue to remember about rising interest rates is that rates increases in the US will increase the value of the dollar against sterling, improving profits of firms doing business there when repatriated to the UK. Spirent is one example of a firm that could benefit from such a change.IFAonline
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