Investec UK Smaller Companies reports top-quartile performance over three years
Launched in July 1982, Philip Rodrigs’ £120m Investec UK Smaller Companies fund has consistently generated top-quartile returns.
The fund is ranked third out of 46 vehicles in the IMA UK Smaller Companies sector over five years to 6 April up 61.7% compared to an average increase of 21.7% according to Morningstar.
Philip Rodrigs has managed the vehicle since June 2006. Over three years the fund is also ranked third out of 54 vehicles, down 0.3% compared to a sector decline of 18.1%. On a one-year view, the fund is ranked seventh out of 61 vehicles, up 66.8% against an average gain of 53.8%.
In recognition of his consistently strong returns, Rodrigs won Morningstar’s award for best UK Smaller Companies Fund of 2009. He also won the UK Lipper Fund Awards 2010 Best Fund over 10 years for Equity UK Small and Mid Caps.
What have been the key drivers of performance since you took over?
My investment style is style agnostic. I aim to outperform in all periods of the stock market, whether the prevailing theme in the market is value or growth or overseas earnings or domestic earnings. I try to focus on what really matters at all points in the cycle. This is basically the outcome of Investec’s four-factor stock screen investment philosophy, which I follow as part of the Investec investment team.
The process asks four questions of each stock and then ranks them according to their score. The four factors are whether: it is higher than average quality; undervalued on a cashflow basis; there is an upward trend in the earnings forecasts and there is an upward trend in the share price. The rankings are refreshed weekly.
When you find all of the four factors in one stock it tends to outperform significantly and more consistently over time. The last three years have been a story about those four factors really helping to drive the performance of the small cap fund.
Which stocks have performed well over the last year?
There has been quite a mix but my holdings in domestic UK companies which I had in February and March 2009 were the best performing stocks. I purchased shares in Trinity Mirror, for example, at 20p and the shares rocketed to over 150p during the period.
Another really strong performer was Immunodiagnostic Systems, a niche medical analysis company. They look at blood samples and determine how much Vitamin D is present in the blood sample. They are a leading player in the global field for this technology, and had a phenomenal year rising from a low of around 140p to a high of around 700p in 2009.
What shifts have you made to holdings in recent months?
I was quite strongly overweight UK-oriented names which had descended to extremely low valuations. I started to take profits on those towards the end of 2009 and in early 2010, switching the portfolio back to a greater tilt towards overseas earnings. This was mainly because of concerns I thought the market was likely to have with the health of the European economies and UK economy plus the UK election disruption, which has indeed been the case.
I felt sterling would be weak again during this phase and so overseas earnings were doubly attractive by also being exposed to the global economic recovery.
So I went through a programme of buying back selected industrial and resources companies and taking profits out of retailers and pub companies in the process.
Which sectors do you favour?
At the moment I am still overweight in overseas earnings particularly the industrial and basic resources sectors, but also back home I am heavily overweight in general financials because they are benefiting from the revival in global market conditions. I have also recently been increasing my overweight in media because those companies are benefiting from increased confidence in corporates.
I am not entirely adverse to UK exposure. I am buying into selective companies which should benefit from increased austerity in the UK where the government is looking for cheaper providers of services. One example is Advanced Computer Software, which provides software into the health care system. They are able to provide very effective outcomes at a fraction of the cost of the NHS IT programme.
Which sectors do you not favour?
I am not favouring consumer exposure in the UK. I am underweight leisure companies, including pubs and heavily underweight UK real estate, which had a good recovery but has stalled recently, and I am also adverse to certain retailers.
Should investors still be looking at UK smaller companies funds?
I think so because what they need to remember when considering UK small caps is there are 800 opportunities between a £30m market cap and a £1bn market cap. And of those 800 opportunities there are many global leading British businesses able to enjoy exposure to the entire global economy, which is improving robustly. So there is great opportunity to find very attractive investments.
In addition we have had a very sharp underperformance by the smaller end of the stock market. At the same time as the FTSE 100 and the FTSE 250 have soared 10% over the past six months the smaller cap end of the market has actually fallen by 7%.
This is quite a dramatic underperformance due to the fears of the domestic exposures. What I am looking forward to is finally getting past the election – which has caused all this uncertainty – so we can get certainty on where we stand, who is in power and what their policies are. Then we can start to focus again on company fundamentals. I think there is going to be a very positive sentiment boost, particularly to the smaller end of the market, as we see the extremely low valuations compared to the rest of the market are unwarranted. We are talking about a 25% upside for the smaller end of the market just to match the valuations in the larger end of the market i.e. the FTSE 250 and FTSE 100.
How will the fund develop in the next year?
All the signs I am seeing suggest the global economic recovery is improving and I think we will continue to see positive news. I think this is possible in the UK as well as overseas because we have had the benefit of the stimulus programme.
Now with the global economic recovery and the low pound this allows our exporters in the UK to have a good time as well. I think as we get past the election uncertainty phase, and move into the second half of 2010 I am looking forward to the market refocusing on the extremely low valuations and finding great opportunities to invest.
I see a very robust end to 2010 for the UK small cap end of the market, and hopefully strong outperformance of the larger end of the market as those valuations are higher. I see very positive developments over the next six to nine months.
