Fund Manager Focus by Jenny Lowe

As the UK proceeds head first into the eye of a financial storm, seasoned fund management star Andy Brough believes that, when it comes to small-cap stocks, only the fittest will survive.

Having read economics at Manchester before launching into a career as an accountant with PricewaterhouseCoopers, Brough joined Schroders as an analyst in 1987 and has been heading the smaller companies team for the last decade.

Outperforming in a storm

And it is this wealth of experience that has more than prepared Brough for the onslaught of the credit crunch that gripped the UK in 2008.

‘At the end of last year, the Schroder UK Smaller Companies fund, despite delivering a negative return, was ahead of its benchmark – the FTSE Small Cap index (ex investment trusts),’ enthuses Brough. ‘This is an environment in which the fittest – those with sound balance sheets and strong competitive positions – are best placed to survive.’

The fund has a ‘bottom-up’ approach with he emphasis being on each company’s own virtues, rather than making judgements about entire business sectors. Brough, along with co-manager Rosemary Banyard, monitors and assesses each investment opportunity based on individual merits.

Brough explains, ‘I look for companies with a unique product for which demand is not being met elsewhere. Once a company moves past this stage, and the competition has increased, we will sell the stock in favour of other companies with better growth prospects.

‘Take Park Group (listed on AIM and valued at £26 million) for example,’ says Brough. ‘It is the only remaining provider of Christmas hampers and because of this, has good growth potential.’

He is also bullish about veterinary drug venture Dechra Pharmaceuticals. ‘Animals are living longer and, in turn, require more veterinary care. Also, if an animal gets sick its owners will seek treatment, despite what might be happening with their financial position.’

Brough not only hunts for companies with unique products, he also looks for those offering a service for which demand is strong, such as pawnbroking firm Albemarle & Bond.

‘This firm is benefiting from the fact that people need to go out and raise money. It is also a beneficiary from the rise in the gold price.’

If it ain’t broke

However, having been around long enough to witness what the markets are capable of, this astute fund manager is disciplined in selling a stock. He believes that, while it is important to cut the losers, in volatile markets you shouldn’t make a rash decision.

‘It makes more sense to step back and try to figure out calmly whether or not the business model of the company is broken,’ explains Brough. ‘If so, I won’t hesitate to cut my position within the following few days. Otherwise, I will brace myself for patience.’

‘Equities are risk capital, they are what you have left after repaying all of the debt and on a risk-reward basis, I think a lot of these companies have been heavily oversold,’ says Brough. ‘I expect that a hint of improvement in the economy or an increase in M&A activity will see the value of these shares rise rapidly.’

He concludes, ‘Given that many smaller companies are undervalued, investors should be looking at a five-year horizon. Contrary to the general perception, there are still many small companies with sound finances and strong market positions to be found, and I remain confident that my portfolio is a reflection of that.’