Now is the most excited Premier Miton’s Nick Ford has ever been about buying into US small caps, according to the manager, given historically low valuations and our position in the current market cycle.
Ford, who has co-run the LF Miton US Opportunities fund alongside Hugh Grieves since 2013, said the duo has therefore initiated an overweight position to smaller companies in the portfolio for the first time in several years.
He told Investment Week: "We had moved out of the sector a number of years ago because, historically, small caps do not perform well late cycle. The time to buy small caps historically has been in the middle of an economic downturn.
"We are not economic forecasters, but it certainly looks as though we are going to have an instant recession in the US. We think the time to start getting invested in small caps is actually now."
As the impacts of the coronavirus pandemic subside over time, the manager said there is a "very good chance" many US smaller companies will see "substantial share price recoveries".
"On one level we are operating in a period of extreme trepidation, but on the other hand we have to follow our investment process," he explained.
"Our process at the moment is showing us there are some very attractive prices on some great smaller companies with long-term growth prospects."
There are two companies in particular that came within Ford and Grieves' buying range that have recently entered the portfolio, having suffered "huge valuation markdowns" in the throes of the pandemic - decking manufacturer Trex and hard surface flooring retailer Floor & Décor.
"Trex is the world's largest manufacturer of high-performance wood-alternative decking. Right now, in fact, Americans are trying to improve their gardens by building outdoor decking areas. But also, instead of using wood, they are now using composite materials which are better because they need less maintenance and they are more durable," Ford continued.
"Floor & Décor are producing hard surface flooring at a time when consumers are moving away from wall-to-wall carpeting. They are doing this using much bigger stores than their competitors, so they can offer a much larger assortment of inventory.
"If you are able to find a retailer with a really in-demand product and room to grow you can normally do well. Walmart during the 1970s was a prime example."
At the opposite end of the spectrum, the LF Miton US Opportunities fund has held a number of companies since the vehicle's launch that are now significantly outperforming many of their US equity peers.
Once such company according to the manager is Teladoc, which provides 24-hour access to healthcare over the phone.
"We first got involved in that when we first launched the fund. Now everyone wants to invest in it because they do tele-medicine, which is of course a way of seeing your doctor online. It is a direct beneficiary of the coronavirus and it has been a tremendous investment for us," said Ford.