After a long period in the doldrums, there are glimmers of hope that investors might start to favour UK small-caps once again. Small-caps tend to outperform large-caps over the long term and the UK market is still very much cheaper than the US.
With that in mind, investors might be interested to see which stocks the experts are backing for a UK recovery.
Three stocks are clear favourites amongst the ‘big six’ UK small-cap trusts: Aberforth Smaller Companies, BlackRock Smaller Companies, Henderson Smaller Companies, BlackRock Throgmorton, JPMorgan UK Small Cap Growth and Income and abrdn UK Smaller Companies Growth.
Hill & Smith, XPS Pensions and Gamma Communications each features amongst the top 10 holdings of three of these trusts.
Hill & Smith is one of BlackRock Smaller Companies’ largest holdings. The company makes both the permanent (galvanised steel) and temporary (concrete) barriers you would see at the side of the road, but its products are sold globally and into multiple sectors – from flood defences to fencing, and electrical transmission poles to fire doors.
It has grown its revenue by 34% and earnings per share by 41% over the past five years, helped by increased infrastructure spending in the US.
XPS Pensions is a big position for abrdn UK Smaller Companies Growth. It consults and helps with the administration of pension schemes in the UK and has over 1,400 clients. Again, it has seen good revenue and underlying earnings per share growth (up 21% and 24% respectively year-on-year). It has also been cutting its debt and hiking its dividend.
Gamma Communications is a significant position in BlackRock Throgmorton’s portfolio. It is a provider of technology-based communications and software services to businesses in western Europe. Its products range from strategic services like inbound call controls and cloud-based telephone networks to more conventional services like ethernet broadband and phone lines.
Its latest interim results demonstrate the strength of the business, with revenue up 10% and adjusted earnings per share up 16%. Dan Whitestone, who manages BlackRock Throgmorton, likes good quality businesses and Gamma’s high degree of recurring revenue (89% of total revenue) helps increase the predictability of its income.
The ‘big six’ UK small-cap trusts have also uncovered a wealth of other opportunities. The largest stocks in each portfolio that do not feature within the top 10 holdings of their peers are as follows.
BlackRock Smaller Companies has 2.2% in aerospace and defence business Chemring. Sadly, it is not hard to understand why defence businesses are doing well at the moment.
Henderson Smaller Companies has 3.4% in housebuilder Bellway. There is hope that the new government will do a better job of addressing the housing shortage in the UK than the last one did.
BlackRock Throgmorton has 2.9% in the UK and Irish building materials company Grafton, which could also benefit if the government can stimulate the construction sector. Whitestone has taken advantage of periods of weakness to top up his holding, feeling that market sentiment was unjustly against it. That stance has been rewarded over the past year.
JPMorgan UK Small Cap Growth and Income has 3.9% in Premier Foods, which owns well-known brands ranging from Oxo to Mr Kipling. It has been a beneficiary of food price inflation.
abrdn UK Smaller Companies Growth has 4% in fund administration business JTC. The managers have been trimming the position after a run of decent performance. Abby Glennie recently tipped it as a long-term investment, saying it boasts highly visible revenue streams, excellent execution and management, and benefits from both bolt-on acquisitions and organic growth.
Finally, Aberforth Smaller Companies has 3.2% in publisher Wilmington.
Amongst the ‘big six’ UK small-cap trusts, the most concentrated portfolio is that of abrdn UK Smaller Companies Growth, with over 35% in its top 10 holdings. At the other end of the scale is BlackRock Smaller Companies with just over 22%.
The two trusts that have the least in common with their peers are Aberforth Smaller Companies (which makes sense given its distinctive ‘value’ approach to investing) and JPMorgan UK Small Cap Growth and Income.
The contrast between these differentiated portfolios and those of large-cap global trusts that are increasingly reliant on the success of a narrow group of companies is stark. These six trusts could be the best way to play a resurgent UK stock market.
James Carthew is head of investment companies at QuotedData. The views expressed above should not be taken as investment advice.