Fund Manager Focus by Rob Langston

Investment veteran Paul Mumford, manager of the £14.2 million Cavendish AIM fund, argues that the sector has begun to bounce back following a period during which it was avoided by investors for a number of reasons. ‘In my opinion these smaller companies had a crash similar to the 1973 crash,’ he says.

However, the fund manager argues that those small-cap concerns that saw their share prices dive off so dramatically, are now beginning to stand out. ‘What has happened since is that the small-cap market has tended to recover and pick up before the large-cap market,’ he explains. ‘Investors have moved down the scale and are looking at small-cap companies again.’

Mumford says opportunities are resurfacing as demand for products and services from UK companies picks up. His largest sector holding in the Cavendish AIM fund is the industrials sector, which accounts for 31.9 per cent of the portfolio and should now benefit from an upswing in demand. ‘The situation is not as bad as it was a couple of years ago,’ reasons Mumford, ‘and this is partly because of the international nature of business. People don’t concentrate quite as much on the domestic UK market.’

Oil and gas favourites
Mumford’s largest individual holding is oil explorer Faroe Petroleum, which represents 4.4 per cent of the portfolio and is one of a number of companies in the oil and gas sector – the fund’s second-largest sector, accounting for 18.7 per cent. Indeed, many of the companies in the oil and gas sector derive part of their earnings from and have operations in foreign countries, among them top ten holdings such as Gulfsands Petroleum and Sterling Energy.

‘Some of the more successful stocks are in the oil and gas sector,’ says Mumford, where there have been ‘some quite significant discoveries’. However, he adds, ‘Sectors such as property, house-building companies and support services companies all have some dependence on the UK economy, and things will get worse before they get better.’

Property opportunities
Having said that, Mumford does believe that there are some opportunities to be found within the property sector, citing companies such as Daejan Holdings and Quintain Estates & Development. ‘Opportunities in housing won’t come quickly. Certainly, the market always anticipates a recovery before it comes, particularly as housing and land become scarce,’ he says. Yet, the manager believes that some businesses do remain attractively priced and could benefit from renewed demand from property investors and buyers. He adds, ‘Henry Boot Holdings owns a lot of land that is going to be scarce. When property prices improve, it’s going to be good for the group’s profitability.’

Increased investment activity from pension funds has also helped buoy smaller companies as institutional fund managers seek attractively priced ventures with growth potential.

‘A lot of pension funds are running deficits, and a lot of them [need] topping up quite substantially,’ he says. ‘Some of this [money] has filtered down into the smaller companies sector, particularly where people see that smaller companies represent value for money.’

Despite holding a number of oil and gas companies and other substantial holdings in economically defensive sectors – such as the fund’s 11.8 per cent weighting in the telecoms, media and technology sector, Mumford says the fund is not defensively positioned.

‘The way I look at things is that I tend to be first a value investor,’ insists Mumford, who considers himself as a stockpicking fund manager. ‘I would certainly look at buying undervalued situations rather than growth companies.

‘I tend to think of the fund as a whole, and the best of the undervalued stocks over time do well,’ he explains. ‘But it will suffer when smaller companies are out of favour with the market.’