With over nine years investment experience, smaller company expert Chris St John took over leadership of the AXA Smaller Companies fund following the departure of Roger Whiteoak in February.

According to St John, the fund’s objective is capital growth through investment primarily in small UK quoted companies: ‘About three and a half years ago the fund was very overweight in UK domestics and when you sit down and look at it, the reason these companies did so well was because the cost of capital was falling and the availability rising. Now we are seeing the unwinding of that.

‘As a result of this reversal, we moved from being overweight in UK domestic to being exposed to companies with overseas earnings, so we are operating in areas of the world where GDP growth is higher than the UK.’

A bottom-up approach
St John takes a bottom up stock picking approach based on monthly meetings with the management teams of individual companies. He focuses on businesses with the ability to withstand difficult economic conditions and with pricing power, whilst being mindful regarding the risk and reward:
‘For example, I would take a much lower position in a very high risk stock as opposed to one that has a low risk low return profile, but has a more stable cash flow, dividend payments and is easier to forecast,’ he says.

One established business he has backed is Fenner, a world leader in the field of reinforced polymer engineering that has a market cap of £420 million. Fenner’s products include conveyor belts and sealing products – supplied to the mining, hydraulics and energy industries.

‘This is a classic company that has a risk and reward. In the first instance, there is a demand for the conveyor belting because of the difficulties that mining companies have with accessing trucks. One of the biggest problems for some time has been the ability to get tyres for them and this is where Fenner’s belting product is very valuable.’

In contrast, St John highlights industrials company Zenergy Power, a manufacturer and developer of High Temperature Superconductor applications in Europe, the US and Australia.

‘This is an early stage company with a lot of intellectual property around high temperature super conductors,’ says St John. ‘And you might think well so what? But, the interesting factor is how they are applying the product. For example, a major utility firm has just begun trials with the product in hydro-electric power stations.

‘The main problem is that the generators that are fitted in the power stations are secured in concrete boxes, meaning they can’t be made bigger when technological advances are made. However Zenergy’s technology can make these power generators much more efficient without having to replace the existing product.’

St John is also a fan of New Zealand-based IT services venture Endace, valued on AIM at £64 million, which has developed a unique hardware-software technology that monitors network activity at the highest network speeds.

‘Basically Endace intercepts and monitors information that travels through various lines and makes sure that it is not terrorist activity or money laundering. This product is unique, world leading and can be used in areas such as time stamping data so there is a regulatory aspect to it as well.’

Despite his fund having consistently outperformed its benchmark, St John says: ‘It’s very difficult to be bullish in small caps at the moment, particularly when everyone else is so bearish, but there is a view out there – for those with a long term horizon – that there is plenty of value around in the small cap area.’