This is according to MAM's Gervais Williams, who says that 2013 will see a large number of dividend cuts from popular blue chips stocks, which will have a significant impact on the sector's income and growth potential. As a result, the manager has a significant overweight position in small and mid caps in his CF Miton UK Multi Cap Income fund.
"I am extremely bullish on the small cap area of the market and I think this rally is sustainable; however, I cannot say the same about the market as a whole," he said.
"We have seen a lot of companies downgrading recently, and though the rate slowed in the fourth quarter of last year, I think we will see more and more corporates with pressures at the margins, which will lead to further downgrades."
"I definitely think there will be room for some dividend cuts in the larger space in the coming year. This won’t just impact the yield investors will receive, but it will mean that share prices will undoubtedly be affected."
"This will mean, unfortunately, that many investors could get caught out."
Williams heads up two portfolios at MAM, the open-ended CF Miton UK Multi Cap Income fund and the closed-ended Diverse Income Trust.
While the manager is admittedly a small cap expert, he says he has seldom seen as much value in this area of the market as there is now.
"I think there are companies in the UK small cap market that are just stunning, especially compared with other larger companies," he said. "They are very attractively valued as well but, for some reason, people are ignoring them."
According to FE data, the Miton fund has a combined weighting of 56.1 per cent in the FTSE AIM and the FTSE Small Cap indices. It has only 5.9 per cent of its assets in the FTSE 100.
This focus has so far been very effective; FE Analytics data shows that the fund is a top-quartile performer since its launch, with returns of 25.85 per cent.
The Diverse Income Trust has very similar holdings to the fund, although it has a gearing of 15 per cent and is currently trading on a 1.9 per cent premium.
It too has a good track record, topping the IT UK Growth and Income sector in 2012, with returns of 40.28 per cent.
Performance of trust vs sector over 1-yr
Source: FE Analytics
Williams highlighted the internet gambling sector and UK manufacturers as two areas where he is finding opportunities.
"The kind of areas we like are sectors which can grow irrespective of market conditions," he said. "I’m keen to get away from the focus of institutional portfolios, which have a high degree of exposure to financials, banking and emerging markets."
"We got some data through yesterday that showed that UK manufacturers are looking in good shape and though there is the issue of overstocking, we have found a number of companies that are not over-supplied."
"It is an area of the market which hasn’t done particularly well in the last 10 to 15 years, but it is now looking strong."
"Another example is internet gambling. There are obviously more screens available with tablets and smartphones so it isn’t just about going to betting shops anymore. We like 888 for example, and although it isn’t in the small cap space, it is an extremely good company. In the small cap space we like NetPlay as well."
888 is a top-10 holding in Williams’ fund, with a weighting of 1.9 per cent. No single company in the portfolio makes up more than 2.1 per cent of AUM.
CF Miton UK Multi Cap Income requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.74 per cent. The Diverse Income Trust has an ongoing charges figure of 1.9 per cent.
Williams’ open- and closed-ended portfolios are yielding 4.36 per cent and 5.33 per cent, respectively.