UK Smaller Companies
The Invesco UK Smaller Companies Equity Fund provides investors with access to a portfolio of 70 -75 UK smaller companies. It is a genuine UK smaller companies fund with over 60% of the assets under management invested in companies with market caps below £1bn. Whilst the fund is benchmarked against the IA UK Smaller Companies Sector as a comparator, it is not constrained or target to it. The managers look for high quality companies with the potential for capital growth but have a keen awareness for not over paying for them.
At the core of the investment philosophy is a belief in active investment management. The investment process is pragmatic which means that there are no inherent style biases within the investment process. Although the managers are looking for high quality growth companies there a strong valuation element to the investment process.
Jonathan Brown runs the fund with Robin West and both are stock pickers, selecting stocks based on their individual merits. The fund remains at the higher quality end of the spectrum preferring to focus on growing companies that have good quality durable products and services. They need to have balance sheet strength and an attractive share price although this is not the defining factor, (this is definitely a growth-based mandate). They screen stocks using quantitative information including Holt and other systems, combined with some sell-side input from trusted brokers as well as the UK and global desks at Invesco – other managers have smaller cap exposure in their funds and they use their knowledge.
They are stock pickers and are not influenced by macro information other than how it affects a particular stock. They retain a contrarian outlook looking for value in stocks misunderstood by the market. The contrarian approach is not across all holdings but they will seek out and invest in specific opportunities that the research identifies. Stock ideas are generated from a number of sources, and can be classified as one of four areas:
Self Help: Good quality companies that have lost their way. These may have new management teams and looking to improve their business model.
Roll - out: Companies aiming to roll out a successful business model more widely enabling the managers to have good visibility of growth.
Roll - up: Consolidation scenarios where by smaller companies are consolidated into a wider network
Structural Growth: Companies exposed to higher growth niches in the economy.
Cash Compounders: Companies that generate high returns and are able to reinvest back into the company.
The aim of the construction process is to maximise exposure to what they believe are the most attractive stocks and sectors, within a portfolio structure that reflects the managers view of the macroeconomic environment. Portfolio construction is based on the outputs of their bottom-up stock research, which in turn, is informed by the top-down macro views.
The approach taken by all Invesco managers focuses on taking advantage of the inefficiency of markets through active and pragmatic management. Including careful stock valuation with monitoring of the macro environment. The smaller companies’ team has been successful for some time in identifying the trends in this area of the market.
The portfolio will hold around 75 stocks with c65% of the portfolio having an average market cap below £1bn. The focus on quality has at times meant investing in companies which seem expensive but the manager has over the long term, made these selections work within the portfolio.
The fund could provide a well-diversified portfolio of UK smaller companies within a broader portfolio of UK equity funds.
The managers have adopted a pragmatic common-sense approach to making long-term investments in companies with strong balance sheets that have attractive risk/reward profiles. The performance track record is very strong and the fund has a disciplined investment process which we feel leads to a strong case for inclusion in a portfolio.
Important Notice
This document is aimed at Investment Professionals only and should not be relied upon by Private Investors. Our comments and opinion are intended as general information only and do not constitute advice or recommendation. Information is sourced directly from fund managers and websites. Therefore, this information is as current as is available at the time of production.
Rayner Spencer Mills Research Limited is a limited company registered in England and Wales under Company. Registration Number 5227656. Registered Office: Number 20, Ryefield Business Park, Belton Road, Silsden, BD20 0EE. RSMR is a registered trademark.