Finding opportunities in UK smaller companies, February 2022

Multinational giants may grab the headlines but it’s often smaller companies that end up delivering the best returns for investors.

These innovative firms are often at an exciting growth stage and a hunger to launch products and services means they can develop at a rapid rate.

Their modest market capitalisations means they’re often overlooked by the stock market – but this presents a fantastic opportunity for investors to get involved.

Here, we take a look at which stocks are currently in favour with the managers of three prominent UK smaller companies funds.

Unicorn UK Smaller Companies fund

The largest position in the fund is US-based Somero Enterprises*, which makes equipment that’s used to place and screed concrete in buildings. The company, which is listed on the FTSE AIM All-Share index, added 0.8% to the portfolio’s performance during January.

Simon Moon, the fund’s manager, highlighted Somero’s recent strong trading update – and the fact that full year forecasts have been increased five times in the past 12 months.

“Revenue expectations for the financial year ended 31 December 2021 have been revised to $130m, which is 50% higher than initially forecast,” he said.

The Fulham Shore, which owns and operates restaurants, is another significant holding in the portfolio*. The company runs Franco Manca, which has 57 pizzerias around the UK. It also operates The Real Greek that opened its 22nd outlet in Manchester at the end of 2021. “Fulham Shore released encouraging interim results during the month, which reported on revenue growth of 10% on the prior year,” added Simon.

Another notable contributor was Braemar Shipping*. This London-based company is an international provider of knowledge and skill-based services to the shipping, marine, and energy industries.  “It added 0.7% in fund performance terms, despite an absence of newsflow,” Simon said.

Liontrust UK Micro Cap fund

This fund is on the Chelsea Selection and seeks companies with a durable competitive advantage that allows them to defy industry competition and sustain higher than average levels of profitability for longer than expected.

Its largest position is in Eckoh*, which provides secure payment solutions for contact centres. The company, which has offices in the UK and the US, supports an international client base.

It performed particularly well last November after announcing its largest ever contract, noted the fund’s managers, Anthony Cross and Julian Fosh, in the latest update.

However, they noted it had slid back after completing a large placing to finance an acquisition. “It announced the £31m cash-and-shares purchase of Syntec Holdings, a UK peer in secure payments through its CardEasy brand,” they added.

The managers also highlighted the contribution to the fund’s performance of Solid State, a supplier of electronic components for use in harsh environments. “Interim results showed that revenues in the six months to 30 September rose by 19% year-on-year, a growth rate which would have been even greater were it not for global supply chain difficulties,” they pointed out.

Anthony and Julian also highlighted Mind Gym, the corporate training business, which aims to transform how people “think, feel and behave” at work. “The effect of the pandemic on its operating model is clear through the increased proportion of revenues from digital products and virtual sessions – from under a third two years ago to over 80% in the most recent period,” they noted.

IFSL Marlborough UK Micro Cap Growth

The managers of this Chelsea Core Selection fund are reasonably optimistic about the outlook. “Despite the economic and geopolitical uncertainty, many of our companies issued updates that were in-line or ahead of expectations, with few profit warnings,” they said recently. “In many cases, cost increases have been passed on and growth rates maintained, providing evidence that the fundamentals remain intact for now.”

The holding that rose the most in January was Eco Animal Health, the manufacturer and distributor of pharmaceutical products for the global animal health markets**. “The company reported that revenues are expected to be in line with expectations and later announced the appointment of a new CEO, who is an industry veteran,” the managers said.

The next largest riser was GRC, the cybersecurity and privacy solutions business, followed by Ten Lifestyle, the technology enabled global concierge platform**.

Over the month, the managers participated in the Marlowe and GRC International placings, increased exposure to AB Dynamics, Instem and Gresham Technologies and trimmed Liontrust**.

*Source: fund factsheet, 31 December 2021
**Source: monthly fund commentary, January 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice. The mention of specific securities is for illustration purposes only and not a recommendation to buy or to sell.