‘Unlike Woodford, we’ll make money from unlisted stocks’

Britain’s smaller companies have had a rough ride since the EU referendum. Their share prices have risen less than those of larger businesses, as domestic and foreign investors have worried over their ability to grow.

For many, these fears have been overplayed and any agreement on a Brexit strategy could give this area of the market a welcome boost.

Richard Watts, manager of the Merian UK Mid Cap fund, is one who takes this view. He tells Telegraph Money how Boohoo is changing fashion and how he’s making sure he doesn’t repeat Neil Woodford’s mistakes.

Those who want to grow their capital and can keep money invested for a long time.

A stock has to have one of three attributes before we buy it.

The first is an ability to make better profits than analysts (or the rest of the market) think. Second is a share price a lot lower than the true value of the company; this can happen if there’s bad news that scares other investors but might not materially affect the business. The third attribute is an ability to grow profits and the share price faster than the average company in the FTSE 250 index. All those combined mean we can beat our rivals and the index.

We also favour companies with an advantage over their rivals and ignore competitive industries such as cars or chemicals. These businesses struggle to have an advantage over each other or their customers. It’s difficult to ignore the suspension of the Woodford fund over his unlisted stocks and we thought carefully when we put them in our fund.

What’s different is that we have 6.6pc of our portfolio in unlisted stocks, but 80pc of that is in foreign exchange company TransferWise and ecommerce business the Hut Group. Both are big and established. We don’t have our money in early-stage biotech stocks; we own later-stage private companies and only a handful of them.

Businesses are staying private for longer and this is an established trend. If we didn’t invest in unlisted stocks, our investors wouldn’t own the fastest-growing companies. The share prices of British “cyclical” stocks – businesses whose profits rise and fall in line with the economy, such as housebuilders – already factor in a high probability of a very bad no-deal. We have always thought the negative impact of no-deal is overstated. But it would be in no one’s interest so we’re hopeful common sense will prevail.

We own some domestically focused cyclical stocks (such as Taylor Wimpey) that we believe will perform better in a managed exit than the FTSE 100. The market needs certainty and for us the danger is not being invested in it. Boohoo, a shopping website, listed on the London market in 2014 and has since grown its share price by about 370pc. The business is involved in fast fashion and designs its own clothes.

Fever-Tree Drinks, and these took a huge hit in the last three months of 2018. This year performance has been better and the fund is in line with its FTSE 250 benchmark.

Our returns should be looked at in the context of Brexit dragging down the market. We have had companies performing well but their share prices just haven’t gone up.