He admits there is a need for caution after the fund returned 15% in the first two months of 2005. Over the two years since launch to February 28, 2005, it has delivered a return of 145.54% compared with 99.72% by the sector average.“We believe there are fewer opportunities among the mid-caps as they are generally fully valued now,” says Manduca (pictured). “We have been taking our bets off the table among these stocks. There is more value among the large and small-caps. “Generally, we believe British equities offer value whereas bonds are expensive. But even if we are cautious about the economic environment, we can always find undervalued stocks among the 2,000 in our universe.” The main areas in which to make money in small-caps, says Manduca, will be from flotations, restructuring and take-overs. A factor in favour of small-caps, says Manduca, is what he describes as the changing dynamics in the UK market: “Private equity has been playing more of a role and this has provided more liquidity. There has also been restructuring and strengthening of balance sheets across the small-cap universe. Many small-caps have been generating cash and have had to increase their dividends. “Majestic Wine, for example, has performed well, but had dividend cover of 3.5 times. We felt that this was unnecessarily high. It then increased its dividend by 50% and the share price responded well.” The fund is currently overweight in resources, which includes 1st Calgary Petrol and Imperial Energy: “There will be one or two new issues in this sector this year as well.” Another overweight sector is technology as Manduca expects companies to increase their expenditure in this area: “We are underweight retailers because we have been cautious on the outlook forconsumer spending.” He says a small fund will be able to take advantage of opportunities in the small-cap sector. The portfolio has fewer than 100 stocks and Manduca believes £200m is the maximum amount of money he can manage with the existing number of holdings.