The trend of small- and mid-cap companies exhibiting positive net earnings is likely to continue in 2018, according to Royal London Asset Management’s Henry Lowson, although he is focusing on opportunities outside of the UK.
Lowson noted that many macro indicators have recently shown that the UK consumer is under pressure from factors such as stagnant wage growth and rising inflation. As a result, he has decided to pay attention to companies and stocks that have exposure to overseas earnings.
“We have done that by increasing weights in things like industrials, healthcare and technology,” the FE Alpha Manager – who runs the Royal London UK Smaller Companies and Royal London UK Mid-Cap Growth funds – said.
“I believe the main risk revolves around domestic consumer, as a result, I have been positioning the portfolio to reduce weight to those sectors, particularly to retail and restaurants.”
Performance of UK stocks by market cap over 10yrs
Source: FE Analytics
Within the industrials space, Lowson said he has witnessed “very pleasing progress” in new order to inventory ratios, suggesting a rosier future for the sector. The sector represents a 33.6 per cent weighting in Royal London UK Smaller Companies.
He also highlighted the move towards outsourcing in the healthcare sector (where his smaller companies fund has an 11.5 per cent weighting) as a factor in driving down costs and making companies more attractive to investors.
Finally, Lowson said there are many structural growth trends in certain areas of the technology sector (such as ID verification) that make it an interesting area to bear in mind. Royal London UK Smaller Companies has 9.1 per cent in tech stocks.
When asked about opportunities for the coming year, the manager noted that small- and mid-cap companies have continued to exhibit positive net earnings revisions which look likely to continue in 2018.
“We’ve seen big pick-up in merger & acquisition activity driven by the low cost of debt and the weakening of sterling. Sterling assets continue to look very attractive and good value to that foreign trade buyer,” he commented.
As a result, Lowson tries to focus on investing in companies where they think they can grow their profit and their cash sustainably faster into the long term.
“We also focus on those companies whether there’s positive optionality or upside risk, where we think the valuations of the companies can be much higher in the future,” he added.
“UK small cap remains an attractive asset class, remains very under-owned by the wider investment community.”
Lowson, who has 13 years’ experience as a fund manager, has been the lead manager of the Royal London UK Smaller Companies fund since September 2016 and recently took over Royal London UK Mid-Cap Growth.
Royal London UK Smaller Companies aims to achieve capital growth by investing in a diversified portfolio of UK-listed smaller companies. Lowson’s stockpicking strategy is focused on finding companies where not all the good news is reflected in the share price and the stock valuation is therefore attractive in both absolute as well as relative terms.
Performance of fund vs sector and index under Lowson
Source: FE Analytics
Since he took over in September 2016, the fund has returned 26.82 per cent compared to a 35.66 per cent return from the IA UK Smaller Companies sector and a 24.04 per cent gain in the FTSE Small Cap (ex IT) index over the same period.
The portfolio’s top holdings include records management company Restore, threadmaker Coats Group, drinks distributor Conviviality and specialty pharmaceuticals company Clinigen Group.
Royal London UK Smaller Companies has an ongoing charges figure (OCF) of 0.73 per cent and yields at 1.03 per cent.
Lowson was appointed to Royal London UK Mid-Cap Growth at the start of 2018. The fund, which was launched in 2009, invests primarily in FTSE 250 stocks and seeks to achieve capital growth over the medium-to-long term.
The fund has a 0.74 per cent OCF and yields 1.48 per cent.