Fund Manager Focus by Rob Langston

13/08/2010

Recent stock market volatility and rising levels of uncertainty are forcing many investors and fund managers to rethink their approach, as macroeconomic strategies fail to impress

In the current market environment, investors in the small-cap arena should be looking at bottom-up strategies. So says David Clark, manager of the £80.4 million Ignis Smaller Companies fund.

‘The fund is driven partly from the bottom up,’ he explains. ‘We don’t employ big macro themes in the portfolio. We look at individual stocks and assess them on their own merits, the level of risk and how that will interact with the risk within the portfolio, and decide whether a small, medium or large position is appropriate.’

Clark typically looks to take advantage of pricing anomalies in the market, focusing on small, fast-growing companies with strong management and cash flows, with a bias towards capital accumulation.

He says that with credit remaining an issue – the small-cap market was one of the hardest hit during the credit crisis as banks became more risk averse and less likely to lend to perceived riskier smaller companies – bottom-up analysis of a company’s finances is essential.

‘We don’t have any hang-ups about investing in AIM stocks, but restrictive credit is an issue and we don’t want to invest in something too small,’ he adds. ‘The company has to be at least a comfortable size before we invest, and it has to be fluid – I need to be able to sell when I want to.’

Cash-rich catches

The Ignis Smaller Companies fund is benchmarked against the FTSE Small Cap index. However, Clark says the portfolio is not constrained to the benchmark, which allows it to build up big sector positions in areas that are under-represented by the index.

This strategy perhaps explains why one of the fund’s largest overweight sectors is Oil & Gas. Cash-rich oil and gas companies may have underperformed recently, but Clark insists that the sector offers value and good growth prospects for investors.

‘We like the sector – it’s quite a large part of the portfolio,’ he says, citing significant holdings in Xcite Energy, a North Sea oil company, Borders & Southern, active in the Atlantic Ocean’s southern basin, and Indus Gas, which is probably towards the riskier end of the portfolio.’

Indus Gas, the fund’s largest holding at 4.6 per cent, is a UK-listed Indian oil and gas explorer set to benefit from the country’s strong growth and increasing demand for energy resources in the region.

Significantly, the fund, while not actively looking for great overseas exposure through UK-listed foreign businesses, is invested in more than one Indian energy company. Clark says India’s corporate governance regime and laws, based on the British legal system, make Indian companies more attractive than other overseas plays such as certain central Asian ventures with less stringent corporate governance.

Healthy options

Elsewhere, ‘healthcare is a more defensive area for us, where we have a variety of different holdings’, Clark explains. He says the sector’s defensiveness is part of its investment attraction, because the current economic environment ‘doesn’t stop people getting sick, and it doesn’t stop hospitals looking for cheaper, better, more efficient ways of doing things’.

Salient examples of defensive healthcare stocks in the fund’s portfolio include immunoassay kit manufacturer Immunodiagnostic Systems Holdings, valued on AIM at £210 million at a recent 752.5p a share, as well as another AIM UK 50 stock, the specialist health and social care recruiter Healthcare Locums, whose shares have recently dropped sharply from a 52-week peak of 287p to 161.5p.

The biggest underweight sector in the portfolio is financials, where Clark fails to see any investment opportunities at present, despite having no particularly negative view on the sector for thematic reasons. ‘There aren’t too many financials to get excited about in the small-cap space,’ he says, ‘and we don’t own anything in that sector.’

Tags: Cash, Growth Stocks

Companies: Xcite Energy , Borders & Southern Petroleum , Indus Gas , Immunodiagnostic Systems , Healthcare Locums

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