Fund Manager Focus by Jenny Lowe

After three years of poor performance, Jupiter’s Richard Curling delivered a 50 per cent return in 2009 but says good returns are still difficult to find

After their valuations were decimated during the financial crisis of 2008, small-cap companies enjoyed an outstanding 2009. But one fund manager is putting this behind him and instead focusing on uncovering the ‘industries of tomorrow’.

Investors, according to Jupiter UK Smaller Companies fund manager Richard Curling, should be looking more at specific areas, rather than general sectors, in order to unearth the real gems amid the multitudinous small-cap ranks. He explains, ‘The smaller companies universe is a nursery for those getting bigger and a graveyard for those going nowhere.’

Stormy waters
Curling took over Jupiter UK Smaller Companies in April 2006, and during this time, the fund has taken a battering. From when he took charge to January 2009, the fund returned -45.23 per cent. ‘Before the 2009 rally, the small-cap sector had been suffering from illiquidity, which left companies and investors in a vicious circle as brokers refocused their research up the market valuation scale,’ says Curling.

However, 2009 was a good year for the soft-spoken Curling, with his fund posting a return of around 50 per cent. And yet he is adamant that the good times for small-caps are anything but over and, even if they are more difficult to find, positive returns are still possible among the market’s tiddlers. To that end, he has turned his focus towards technology and industrials and on a stock-specific level, he is looking for ventures with overseas exposure for inclusion in his fund.

‘One secular growth theme at the moment is the internet. Everything that people said would happen during the tech bubble is now taking place, just not as quickly as anticipated – hence the tech bubble bursting back in the early part of the decade,’ he enthuses.

Curling highlights Allocate Software as one small-cap stock to watch. ‘Last year, Allocate’s revenues were up 37 per cent and profits rose 47 per cent. What is really interesting here is that 70 per cent of its sales are in the healthcare industry. Across the UK, 98 NHS trusts now use its workforce-optimisation software, representing a 66 per cent increase compared with a year earlier.

‘The company has also been on an acquisitions spree. BHP was the second business acquired by Allocate in 2008, which established its position in the NHS temporary staffing services market, and the group recently completed its third acquisition, Sweden-based software provider Time Care AB, for £8.7 million net,’ says Curling.

A picture of growth
He also likes the look of specialist digital camera developer and supplier Andor Technology. ‘Every year, this company has managed to increase sales and profits, and track records like that count for a lot. This is a classic small-cap stock that is undervalued by the market. You invest in small-caps to find those stocks with the potential to make you a lot of money,’ he adds. But finding such gems isn’t easy.

Curling’s investment process is driven by targeting companies that both grow their top line and produce a real return on capital. He concludes, ‘If you identify these traits in a company, you have a certain margin of safety because, with some certainty, it will be worth more tomorrow than it was yesterday.’