Companies: HBR    SYR    XAR    ZOX   

Andrew McDonald has been a small-cap fund manager for nine years, but his current fund, the ACDS Parkfield UK Smaller Companies Fund, balances the investment risks associated with high-growth small-cap companies by dipping into the mid-cap arena too. ‘The benchmark for the fund is the FTSE 250 because, although my background is as a small-cap manager, a lot of our investors are pension funds and they wanted that sort of exposure as well,’ he explains.

Despite the fund’s focus on growth companies, McDonald operates under the assumption that such growth shouldn’t always come from the top line. He says: ‘To get exposure to the energy markets, for example, you need to get exposure to the activities that are related to that sector, rather than just exposure to the pricing.’ Globalisation has also had a big effect on McDonald’s investments, as he explains: ‘The world is growing and this means increasing demand, but prices are not rising in line with this demand because developing economies don’t have that level of disposable income. It is the end demand for products and services that we are investing in.’

An example of this strategy in action is the fund’s investment in Full List industrial engineering firm Fenner. ‘Most of its activities relate to getting things out of the ground, for example, conveyor belting – Fenner is one of the top two in this field, even though it is a small company,’ he continues. ‘Fenner also produces hydraulic seals for vehicles and so on, which makes the company’s activities very diversified. It doesn’t have a massive exposure to the end product either.’

McDonald also invests in AIM-listed companies, but again takes a cautious approach to the market. He invests a maximum of ten per cent of the fund in AIM stocks and only in those offerings that are unique within the index. ‘I don’t tend to invest in new AIM stocks,’ he points out. ‘Synergy Healthcare, the fund’s biggest AIM holding and a fast-growing provider of sterilisation and infection control solutions for hospitals, is a good example. Another is ZincOx, which has grown by 50 per cent since purchase. I bought this as an insurance policy on the metal price and I couldn’t find an equivalent in the FTSE 250.’

Prudent purchases
Two other recent small-cap purchases are electronics company Xaar and travel and leisure sector occupant Holidaybreak, ‘one of the most cash-generative businesses going’ and one which made an interesting acquisition earlier this year that smoothed out the cyclicality of the business. ‘The company offers generically affordable holidays for people spending in sterling. So, as sterling strengthens, Holidaybreak is set to benefit. The acquisition was PGL Holdings, the established market leader in organising trips for schools and a natural fit with the existing Holidaybreak business.’

Xaar is involved in specialist inkjet printing and, according to McDonald, ‘once its technology is fully rolled out and licensed, that will give access to an increasing revenue stream. Xaar also has quite good exposure to China compared to other small caps in this sector.’