Viewpoint - Richard Staveley, Majedie
The fund manager looks at how small companies are faring in the current economic climate, as well as the best prospects for growth.
Small companies form part of Majedie’s portfolio for the St. James’s Place UK Growth fund. How do you work with the other managers of the fund at Majedie? Are there synergies between the different parts of the portfolio and do you get ideas from other managers?
My portfolio is drawn from the 1,300 companies that make up the bottom 10%, by size, of the FTSE All-Share and from the AIM Index, and account for 10% of the fund’s assets; although that figure is dynamic – it has been as low as 7% and as high as 13%. I have regular, informal discussions with the other three managers – James de Uphaugh, Matthew Smith and Chris Field – mainly about macroeconomic trends, market intelligence and sectoral insights. There are occasions when we overlap. For example, Chris and I both acquired shares in the Home Retail Group ahead of the takeover offer from J Sainsbury. But these instances are rare. The key synergy comes from the portfolio having exposure to the good, long-term performance of small companies through having a dedicated manager and a diversified stock selection, something few other UK allcompany funds have.
What is the outlook for small companies? Which sectors and companies offer the best prospects?
The long-term performance of small companies has been outstanding. That said, the past few years have been particularly strong for the sector, so a period of mean reversion is to be expected. There is also the issue of Brexit. While I think that is unlikely, the chance of it happening is greater than the market believes. The impending normalisation of interest rates is also a headwind. I take a stock-picking approach and am currently focused on domestic secular trends, as well as companies that are not economically sensitive and are using self-help to drive profit growth. In addition, we are overweight on companies exposed to overseas earnings. At the moment, for example, there are some attractive, well-funded oil and gas companies. All shares in the sector have been driven down by the falling oil price, irrespective of their ability to withstand its effects. There are 124 oil and gas companies in our small-cap universe; we narrowed this down to nine that have a strong financial position, from which we expect to make attractive returns over the next few years. These include Cairn Energy, Ophir Energy and Rockhopper. We also like the gaming sector, which is hugely cash-generative and has a long-term upside from the opening of the US to online gaming.
What are the key factors that you will look at before deciding whether or not to invest in a company?
There are three key factors we consider: are the market’s expectations of future profit realistic? Are the shares good value, available to buy and trading at a decent discount to the company’s true value? And is the company generating shareholder value? The latter can be achieved through recovery of the company after a difficult period, or through management change, because it has the ability to sustain above-average growth, or because it has a high return on capital.
Small companies are perceived as higher risk than larger ones. How do you control risk within your portfolio?
It’s easy to make the assumption that small companies present a higher risk than larger ones: they have less access to finance, they are usually less diversified and there will be less liquidity in their shares.
That means there is usually greater price volatility in the short term, but that volatility is only relevant for short-term investors. The performance of small companies over the long term has compensated for those short-term risks.
Larger companies can also be slower to react to changes in their marketplace, and they may have fewer opportunities for growth, relative to their size. Many recent seismic events, such as the 2008 banking collapse and various ill-judged acquisitions, have affected large companies.
We control the risk through diversification: I have between 100 and 120 small-company investments. A portfolio run by one manager across all company sizes would be very unlikely to have that many. A standalone small-company portfolio may also be forced to sell at the worst time – for example, when sentiment turns against the sector. As part of a multi-manager structure of the fund, the UK Smaller Companies element is removed from that pressure as we can choose where in the portfolio we buy and sell. We also employ positive screening, so we allocate less capital to those areas where the risks are at their highest.
Past performance is not indicative of future performance. The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The opinions expressed are those of Richard Staveley of Majedie and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.