Fund Manager Focus by Jenny Lowe

Having been at the helm of the M&G Smaller Companies fund since 2001, Simon Bailey judges every stock on three counts before deciding whether to include it in his portfolio: ‘I must have confidence in the management of a company; it needs to operate in an area where there are high barriers to entry; and the company must have opportunities for growth,’ he explains.

‘A lot of small-cap companies tend to be younger firms and quite often can have rapid initial growth, but then be squashed by a larger company. I want to find stocks that can sustain their advantage.’

Ability to burgeon
Bailey points out that, while his fund isn’t necessarily a growth fund, the stocks he favours must have the potential to grow into large companies. He points to fully listed property services concern LSL Property Services, currently 292.5p, as an example.

‘Many people will have heard of LSL over the past month because it is the company that bought the Halifax Estate Agency for just one pound. LSL boasts a superior competitive position, operating margins in the high teens and limited capital requirements, and has a solid balance sheet,’ enthuses Bailey.

‘In addition, LSL is run by an excellent management team that owns over a third of the company and is savvy both in terms of operations and capital allocation.’

According to Bailey, the housing sector is one to watch as the markets start to recover: ‘Housing transactions have fallen off, dropping to around 600,000 per year. I have taken the view that this will eventually pick up. LSL is obviously a key beneficiary of this theme.’

He also has a significant holding in Hansteen, which earlier this year moved from AIM to the full list. In June, it raised £195 million to take advantage of distressed UK commercial property sellers. At that time, Hansteen, which had previously focused on Germany, the Netherlands, Belgium and France, said now represented an ‘outstanding opportunity’ to re-enter the UK industrial property market.

Bailey also sees value in the technology sector, where he is a fan of a number of companies with strong balance sheets and good growth opportunities. Alterian, the marketing software provider whose shares are trading at 186.5p, is one venture that has witnessed dramatic share price fluctuations over the past 12 months, ranging from 48.5p to 196p. ‘The fund has quite a large exposure to technology companies, with many stocks starting to see an increase in their share price.’

Also in the technology sector, Bailey highlights Aveva, a computer design and software firm trading at 975.5p, which he insists is very cash generative and of high quality.

And with the small-cap sector leading the recovery, Bailey is keen to profit. ‘Having been through the dot-com boom, I had learnt how to deal with rapidly falling markets and knew that things do recover, especially when people are selling. Now is the time for smaller companies, and this fund is in a great place to benefit.’