Fund Manager Focus by Jenny Lowe

Increasing M&A activity will provide a solid backdrop for the tiddlers this year, claims Henderson’s Neil Hermon

Manager of the Henderson UK Smaller Companies fund, Hermon believes that, although the markets will remain choppy for some time to come, there are some excellent opportunities for stockpickers.

‘2009 was a really good year for smaller companies, driven by the improving economy,’ says Hermon. ‘This year so far has been a little trickier, but extreme cost cutting during the downturn means that there are some really good growth companies to be found in niche areas.’

He points to AIM-quoted Rockhopper Exploration as a prime example. The oil and gas exploration firm has had an outstanding time of it of late, with its share price having gushed from a low of 28p to 234.25p over the past year.
‘I view Rockhopper as being quite high risk,’ says Hermon, ‘but we were lucky that it struck oil in the Falkland Islands.’

M&A boon
M&A is also expected to provide a boon to the smaller company arena as activity picks up from low 2009 levels.

The star fund manager explains, ‘It will be a key way of driving growth in a low-inflation environment, and we are already seeing faint stirrings in the M&A arena, with particularly significant opportunities for European companies to look into the UK market.’

Hermon, who describes his investment style as stockpicking with a growth bias, says he is now particularly keen on industrial companies, especially those that export into emerging industrial markets.

‘We like overseas markets generally,’ he says. ‘We think that companies that are exposed to the emerging markets, particularly Asia-Pacific, are very attractive.’

He cites Full List venture Hyder Consulting as one to watch. ‘The share price has been hit by the UK market, but this firm actually has 80 per cent of its business overseas, and with a new management team installed, it certainly has good prospects in terms of real growth.’

Media opportunities
Business media is another sector where Hermon insists value abounds. He explains, ‘The valuations are very low indeed, and when things improve, which they eventually will, these companies will do very well.’

Top holdings in the fund include such firms as Victrex, a specialist chemicals manufacturer, which also has a strong medical implant business. Another key position is business-to-business publisher Informa, which has just delivered good 2009 results.

The fund is currently underweight in real estate and financials, but Hermon believes that there are still companies within these areas worth a punt: ‘I like Intermediary Capital, which is trading at a fairly big discount to net asset value. However, the firm has a nicely growing fund management business that isn’t currently being reflected in the share price.’

He adds, ‘I believe 2010 will see a return to favour of growth stocks over cyclicals, and this year companies that can genuinely grow their top line and their earnings will come back into fashion. Corporate earnings have remained remarkably robust in this downturn. Although top-line growth has been pretty weak, profits have been well protected by management action, and that will continue.’