UK small cap companies are dead cheap, claim managers of the popular Invesco Perpetual UK Smaller Companies Investment Trust (IPU).
‘Equity valuations within the smaller companies sector are well below their 20 year average and we believe there is potential to make money even in this highly uncertain environment’, insisted Jonathan Brown and Robin West, joint fund managers of the Invesco small cap fund in today’s half-year results statement.
One of Shares’ running Great Ideas selections, the fund’s net asset value (NAV) per share shot up by an impressive 15.8% on a total return basis (with income reinvested) during the six months to 31 July, dramatically outperforming a 3.6% return from the benchmark index.
Jonathan Brown, joint manager of Invesco Perpetual UK Smaller Companies
STICKING TO THEIR KNITTING
During this testing period, co-managers Brown and West stuck to their proven strategy of investing in ‘good quality, growing and well managed companies’ across the UK small caps market.
They run a 71 stock book of growing businesses with the potential to be ‘significantly larger in the medium term’. The experienced small cap stockpickers, who have differentiated the fund by having an enhanced quarterly dividend, seek out companies with either great products or services and pricing power, firms able to take market share from competitors or those exposed to higher growth niches within the UK economy or overseas.
Avoiding blue-sky companies, they prefer to invest in ‘cash generative businesses that can fund their own expansion, although we are willing to back strong management teams by providing additional capital to invest for growth’.
DOING IT FOR THEMSELVES
While they still see scope for investors to make money, ‘in light of the uncertain backdrop, we continue to favour stocks with “self-help” characteristics that enable them to grow independently of the economy’.
During the half, the wider UK stock market outperformed the small cap market, yet Invesco Perpetual UK Smaller Companies generated healthy returns as overweight positions in the media, technology and support services sectors more than made up for a headwind from the health care sector.
STAR PERFORMERS
The best performers included publisher Future (FUTR), whose shares surged 106% higher in the period, veterinary services consolidator CVS (CVSG:AIM), which ‘re-rated strongly as it began to recover from a period of weaker trading’, not to mention exhibitions business Tarsus, taken over at an attractive premium, and promotional products purveyor 4imprint (FOUR).
Dogs included accounting-scandal-stricken Staffline (STAF:AIM), embattled fashion brand Ted Baker (TED) and Consort Medical (CSRT), the latter’s earnings downgraded due to the downtime resulting from a health and safety incident at one of its facilities.
RECENT ADDITIONS
Brown and West explained ‘this was a much quieter period for new holdings than is typically the case. We have continued to appraise a significant number of potential investments but have in most cases reached the conclusion that our existing holdings have a greater potential to generate shareholder returns.’
One of Loungers' outlets, in Solihull
That being said, they purchased casual dining outfit Loungers (LGRS:AIM) as an IPO. Brown and West enthused: ‘It is a cafe bar operator with the potential for a significant roll-out of new sites. The concept is very popular and its all day trading format produces an attractive return on capital.’
Other new additions were health care product and adhesive manufacturer Scapa (SCPA:AIM) - ‘a business we have followed for some time and the decline in the share price offered us with an interesting entry point’ - as well as oil and gas sector play Jadestone Energy (JSE:AIM), attracted by ‘very cash generative’ producing assets off the coast of Australia and growth potential in the Far East.
