We are building up Britain’s army of innovative small firms – brick by brick
SMALLER companies have been a smart place to invest – with returns outpacing those of larger firms for years. Why? Because they are ‘more nimble and innovative and find it easier to grow’.
That is the assessment of Mike Prentis, co-manager of BlackRock Smaller Companies Investment Trust. His conclusion is borne out by the spectacular performance of the investment trust, which has beaten its rivals by a large margin over the past 15 years.
Prentis has picked about 170 companies to diversify the risk inherent in smaller firms.
Though all are listed in the UK, much of their sales and growth is in international markets, helping to insulate the fund from the uncertainties facing the UK economy (Brexit for one).
Prentis says: ‘We’ve been changing the mix over the past few years with a shift towards being less domestically focused.’
One of his biggest investments is recruitment agency Robert Walters. He says: ‘70 per cent of the company’s net fee income is from overseas. It’s doing well in Thailand and Indonesia.’
Indonesia, for example, is working to attract expats back to work in its fast-growing tech sector. Another profitable area for Robert Walters is to go into businesses and take over their whole hiring process for them.
Another operation with strong global credentials is Alliance Pharma, which recently bought the rights to market the antidandruff shampoo Nizoral in the Asia Pacific region. Prentis says: ‘It is really good at acquiring niche brands that do well. More than half of its sales are international.’
Part of the trust’s shift involves reducing exposure to retailers with too great a high street presence. It is switching to those who have made internet shoppers their priority – such as musical instrument retailer Gear4music and women’s fashion firm Quiz Clothing. Prentis says: ‘Our exposure is quite defensive at the moment. We see the data on economic growth deteriorating so want to be cautious.’
Reflecting this caution is the fund’s investment in Ibstock, the brick maker. Prentis says: ‘This is a cyclical industry but the reality is that more houses are going to be built in this country whichever government is in power.’
He was impressed by a recent visit to Ibstock’s high-tech plant in Leicester which will ratchet up production with capacity to build at least 10,000 houses a year. Prentis also says stock market flotations provide important opportunities. The fund did well from the flotation of broker Hargreaves Lansdown, a stake it has now sold. Other successes include soft drinks maker Fever Tree, whose shares have rocketed in the four years since it floated.
Earlier this year the trust bought into IntegraFin, owner of the Transact investment platform used by financial advisers to manage client funds. Prentis is optimistic the company has the potential to significantly grow the assets held on the platform.
The 60-year-old, at the helm since 2002, was recently joined by a younger colleague Roland Arnold – with succession planning in mind. In addition, the trust’s annual fee was raised but the performance fee scrapped, which should benefit investors.
Though income is an important contributor to the total return – the dividend has risen every year for 15 years – Darius McDermott of broker Chelsea Financial Services believes that should not be a key motivator for investors.
He says: ‘The yield is quite low at 1.8 per cent, so if income is what you are looking for, you may be better off elsewhere.’