US exposure is best for small caps

BlackRock’s Mike Prentis likes to focus on growth companies in small caps and is increasing exposure to the US as he considers its private sector the most secure source of growth

FS Beth Brearley 160 byline

BlackRock’s Mike Prentis is increasing exposure to the US in the Smaller Companies Trust on the basis the American private sector is “the most secure source of growth”.

Prentis – who has managed the fund for over a decade and whose tenure pre-dates BlackRock’s role as investment manager – focuses on growth companies within the small-cap universe. He looks for companies which he thinks have the potential to grow much larger in the medium term.

The £378m fund has 160 holdings – which Prentis recognises as being an “unfashionable” number – 60 per cent of which are core, high conviction holdings each comprising about 1.5 to 2.5 per cent of the portfolio. The balance is in companies the manager is building knowledge of and wants to develop confidence in.

“We have tried to create a good absolute return fund with low risk, and that is exactly what we have done,” Prentis says. “We are not looking for big bets or high alpha, we are looking to do well every year.”

So far Prentis has increased the trust’s exposure to the US by a few percentage points, taking it to about 20 per cent, saying that he is “continuing to look for opportunities”. New holdings include Tyman, a manufacturer and distributor of door fittings.

“Tyman recently acquired Truth Hardware (a North American window and door hardware manufacturer) and now has 50 per cent of its sales in the US. It is aiming for the housebuilding market picking up in the US.”

Sales within the fund have generally been stock specific, although Prentis says he is “not enthralled with continental Europe”, where the weighting is currently 12 per cent.

“We do not have much pure exposure to continental Europe. Our exposure is typically through very international companies that have exposure there. It is an area we would take out if we could easily do so,” he says.

holdings

From a sector standpoint Prentis favours electronics, which is the fund’s largest overweight at about 7.5 per cent, with notable holdings including Oxford Instruments and Renishaw, which Prentis describes as “international companies with great technology and fantastic management teams”.

Conversely Prentis is cautious about companies exposed to government spending, for example firms which are the beneficiaries of outsourced contracts, providing basic services such as property management, saying of the government: “they are not an easy customer anymore”.

Year-to-date the trust has returned 17 per cent against the 14 per cent average of the AIC UK Smaller Companies sector on a total return basis, according to FE Analytics. Prentis picks out four stocks as having performed particularly well recently.

Xaar, an inkjet printing technology group and the leader in ceramic tile decoration saw its share price rise 95 per cent in the last quarter and has seen earnings upgrades on the back of “fantastic” results over the year, Prentis says. Meanwhile tech stock and video search engine Blinkx revealed its revenue was up more than 70 per cent in the December full-year results.

“With Blinkx you can download video clips and there is a huge library of content,” Prentis says. “It is paid for by the advertising revenues generated. It is doing extremely well, trading internationally and is big in the US.”

Another holding with exposure to the US is the equipment rental group Ashstead. Prentis says it has benefitted from what he describes as the structural trend in construction companies in US hiring plant rather than buying it themselves and a pick up in housebuilding in the US, leading to a strong pick up in earnings upgrades.

The fund management group Polar Capital has also served the trust well. “We like fund management companies in a rising market, and we particularly like this one,” Prentis says. “It has an excellent management team and is still quite small so has room to grow. Polar Capital has done very well in Japan and also has good US and tech teams. It is a good business which is adding assets under management.”

In the medium term Prentis is “very positive on smaller companies”.

“There is plenty of data on the performance of smaller companies compared to large caps. Over the last decade they have outperformed when the economy is growing. They tend to outperform in most times, although not during recessions or times of great uncertainty. Now is a good time for smaller companies, but you have got to pick carefully. With the right management teams the sector is well set over next few years. It is difficult to call for the next three months but we are certainly positive over the medium term.”