Fund Manager Focus by Jenny Lowe

Still relatively unknown to most investors, Philip Rodrigs has been climbing up the ranks in the small-cap world. On his appointment as lead manager of Investec’s Smaller Companies fund in 2006, following the departure of Dan Hanbury, he became one of the youngest fund managers in the City at the tender age of 25.

But despite his relative youth, the fund has had a good run in recent months, up 62.6 per cent since the start of the rally in March and up by 73.4 per cent in the year to date. By comparision, the FTSE Small Cap ex Investment Trusts index rose by 79.5 per cent and 70.8 per cent respectively over the same periods.

And this isn’t confined to the short term. Over three years the fund has returned 14.3 per cent, outperforming the index, which fell by 18 per cent – proof that Rodrigs has earned his position as one of the best small-cap fund managers around.

A four-factor analysis
So how does he do it? Well, his stock selection process isn’t anything we haven’t seen before. He embraces what Investec calls the ‘four-factor process’, which is based on the behavioural patterns of investors. Rodrigs explains: ‘The process basically aims to identity companies that exhibit higher than average quality, better than average value, improving expectations or current profitability and share price strength.’

‘Stocks are ranked one to four based on each factor,’ he adds, ‘so the highest score is 16 and the lowest is four. The highest-scoring stocks are then considered for the portfolio.’

The fund looks to invest in 60 to 90 companies with a market cap of £30 million to £1 billion. And one stock that scored high enough for inclusion in the fund is LSL Property Services. Rodrigs says, ‘This stock hit the headlines recently after it snapped up Halifax Estate Agencies for just £1; and having taken them on, LSL is now refocusing on the core business. I am hopeful LSL will continue to produce good returns.’

He also favours financial technology specialist GlobeOp Financial Services. ‘This firm listed just before the markets fell out of bed, and being heavily involved in the hedge fund industry it naturally saw a decline in demand throughout the crisis.

‘Now that the markets are in recovery mode, the company essentially has two more growth areas to benefit from – the proposed increase in regulation of the hedge fund industry and the opportunity to acquire as a result of having a cash balance.’

He enthuses, ‘I paid £1.40 for a significant stake and it went up to £1.90 within a week. GlobeOp Financial Services has the ability to grow very rapidly.’

Rodrigs explains that a lot of stocks have been surprising investors with their returns and there is more to come. ‘If I apply my four-factor process to the market, the smaller companies arena is still undervalued.’

He cites AIM-quoted Immunodiagnostic Systems Holdings (IDS) as one to watch. ‘This company produces a test that assesses levels of vitamin D in the blood. It is the best at differentiating between types of Vitamin D, so it is not surprising that its share price has risen from £1.40 when I initially invested to £5.50 today, and that its year-on-year sales are up 100 per cent.’

He concludes, ‘Smaller companies are clearly outperforming the market, and recently we have seen a strong appetite for equities. Have investors missed the small-cap boat? Absolutely not.’