Small cap fund managers are increasingly looking to invest in hi-tech growth companies at the expen...
Small cap fund managers are increasingly looking to invest in hi-tech growth companies at the expense of traditional smaller companies, a new survey by accounting firm KPMG has revealed.
The study of more than 90 managers of small investment funds, conducted last October, found there was 17% more to invest in small cap stocks among small company fund managers, but this was heavily weighted toward the technology sector.
Small cap fund managers were willing to invest, on average, £3.25m in the small cap sector, but looked to make larger investments in a smaller number of stocks.
About 65% of respondents mentioned growth prospects as a key determinant in investing in small cap stocks, while about 16% said the market often undervalued smaller offerings.
However, 76% of fund managers cited lack of liquidity as a their main concern about the small-cap sector, and one in four of those questioned said the sector's high risk status deterred them from investing.
The sentiment towards high growth small cap shares was shared by Simon Smith, lead fund manager of Capel Cure Sharp's UK Smaller Companies Fund, said his fund concentrating on investing in the businesses of tomorrow.
Smith said many of the FTSE 100 stocks of the future were in the FTSE 250, small cap and AIM markets today.
"In 2005 the FTSE 100 will be very different from today, heavily weighted towards modern sectors like telecommunications, media, software, internet and intellectual property companies. You need to have holdings in the growth sectors as a small cap fund manager to be in the running to pick the winners."
Smith cited research from Euroconsult that showed European television channels had grown from about 100 in number in 1991 to more than 500 in 1997, and the programme licence and merchandise market for US children's TV programmes alone was worth $15bn in 1998.
"If you can pick just one small company that successfully taps this market, then you've selected a winner that will make good returns to your fund," he said.
Smith listed industries such as the internet, e-procurement and mobile phone enabled commerce, intellectual property services and retirement savings companies as among the businesses of tomorrow.
He picked out a number of key economic and governmentally driven negative factors that were hindering the growth of old-economy small cap stocks. They included a low growth and low inflation environment, global competition and the IT revolution itself and better share incentive schemes in small caps with potential for accelerated growth in share price.
Smith said his strategy to find winners among more modern industries and avoid the slower businesses had paid off in the form of fund shareholder returns.