David Stevenson - Fund ManagerDavid Stevenson joined Amati in 2012. In 2005 he was a co-founding partner of investment boutique Cartesian Capital, which managed a range of retail and institutional UK equity funds in long only and long/short strategies. Prior to that he was Assistant Director at SVM, where he also managed equity products including the UK Opportunities small/midcap fund which was ranked top decile for the 5 year period from inception to 2005. David started his career at KPMG where he qualified as a Chartered Accountant. He latterly specialised in corporate finance, before moving into private equity with Dunedin Fund Managers. David has co-managed the TB Amati UK Smaller Companies Fund, Amati AIM VCT since 2012 and the Amati AIM IHT Portfolio Service since 2014.
Are smaller companies a good place to be in a low growth world?
Posted by David Stevenson on 15/Oct/2015
At first glance, the wider picture for equity investment doesn't look promising. The IMF has just downgraded its 2015 forecast for global growth to the lowest level for six years; China, the biggest engine, is slowing; two of the other "BRIC" constituents - Brazil and Russia - are in recession; world trade volumes have stalled; commodity prices have collapsed; debt levels remain stubbornly high; and stock market volatility has spiked.
There are positives nevertheless: in the US the consumer is benefiting from cheap fuel and is inclined to buy cars, and houses, amidst a broadly supportive jobs market; the UK economy is similarly robust; whilst Continental Europe is showing signs of recovery even if the European Central Bank remains ready to provide further stimulus. After seven years of extremely accommodative monetary policy, however, the strongest regions of global growth still look pretty average by historic standards.
Clearly, as a specialist investor, Amati is a firm believer in UK smaller companies as an asset class. But even an unbiased assessment of the global landscape should identify the appeal of the UK market relative to an unnerving global picture. A combination of subdued inflation, rising real incomes and growing job vacancies, has created a confident consumer, which in turn has benefited the domestic economy.
Whilst there are manufacturing headwinds, particularly due to the strength of sterling, UK service activity provides a buoyant, offsetting influence. In addition, there are plenty of structural growth themes to play within the UK stock market, including a vibrant technology sector not only for mainstream IT but also in disruptive areas such as clean tech, med tech, fin tech and social media. With the strength of the consumer economy, there is also a helpful tailwind for emergent retail and leisure brands, whilst outsourcing trends continue to benefit support services companies.
The old adage that small caps are permanently disadvantaged by a lack of access to talent pools and finance, is beginning to look less relevant in an environment where graduates and apprentices are attracted to entrepreneurial, start-up companies, rather than less dynamic, large organisations; and where crowd funding is re-writing the rules for business financing.
All of these factors are likely contributors to the significant outperformance that UK smaller companies have already achieved. Over five years, they are the best performing global IA asset class, with emerging markets the worst, and over ten years they rank sixth. A contra-argument would obviously be that the best is already past, and indeed it would be fair to say that valuations across a broad swathe of the UK mid and small cap universe are beginning to look up with events. However, based on forward price earnings multiples, a pocket of value still exists within companies of £350 million capitalisation or less. This reflects one of the few remaining areas of UK stock market inefficiency, caused by limited research coverage or institutional ownership of companies at this end of the size spectrum.
Disciplined, experienced active management can still uncover investment opportunities, with the added advantage that companies of this size have the potential to generate superior earnings momentum in an otherwise mature growth environment, given their lower base and exposure to many of the fastest expanding niches within the UK economy. An important tenet within active investing is not to be too distracted by the big picture. Active investors focus on the micro, not the macro. They buy into companies, not economies or indices, and whilst the overall environment may be troubling, there are always growth opportunities to invest in.