For the past five years, Britain has been in recession. Following the global credit crisis, developed nation governments have sought to inflate their way out of a deficit. These are not prime conditions for smaller companies, and yet - small caps have thrived.
Miton manager Gervais Williams runs both smaller company and income funds for the group and he says that the best is yet to come.
Emma Wall: Hello, and welcome to the Morningstar TV series, "Why should I invest with you?" I’m Emma Wall and here with me today is Gervais Williams of Miton.
Hello, Gervais.
Gervais Williams: Hello. Nice to be here.
Wall: So traditionally you have been a small-cap manager, but over the last couple of years you have launched some income funds. Why is this?
Williams: I think the world is changing. Prior to the credit boom, it was very much about growth. Small cap is all about growth. That’s been a very good area. But as we move beyond the credit boom, I think, the score card is changing. I think we’re looking at not just capital gains, we’re looking at the compounded income. Getting in something over 4% yield which grows to a 5% and a 6% and a 7% over years, and the advantage of that is it doesn’t quite matter whether the markets go up and down intertwining periods if you’ve got something, which is growing an income, it's something which is going to deliver real value in the long-term.
Wall: And looking at the last four years, we’ve had Bank of England base rates to a record low. How has that impacted income?
Williams: I think, income stocks have become more attractive. There has been more buyers of them. But I think they’ve mainly concentrated the buying power in really large companies. Many of the high income stocks at FTSE have done very well, performed very strongly, and are arising to very significant valuations. The really interesting thing is that pattern is beginning to move down the market cap range. You’re beginning to see that more in the smaller companies down to £100million market cap. Below £100million, they’re still incredibly cheap and there are some fantastic opportunities.
Wall: Over the last five years, we’ve technically been in a recession. A time when small-caps don’t tend to do well, but small-caps have done exceptionally and mid-caps too. Why is this?
Williams: I think, it’s really related to the fact that if you’re a small company, you’re not necessarily dependent on the economy at large. You can grow at a different rate and although, the economic conditions make a difference, some companies won’t do well. The companies, which are successful, are very successful against a universe, which is fairly flat.
So, I think it’s been a very interesting period, where small-caps have outperformed, when indeed they underperformed for the previous 25 years during the period of globalization and international kind of the emerging markets and all those things. So, I think we’re starting a new trend too.
Wall: And can we expect this to continue?
Williams: Absolutely. I mean, I think it’s only just left the station in terms of the train. I think we’re in a period where the difficulties beyond 2008 have been through a kind of phoney war. If you go back to 1939, the start of Second World War, we had a period when there was no hostilities up to about 10 May 1940, and then the fall had already began. And I think we’re just going through that with QE, as QE comes to an end. I think the real opportunities to see differentiation is going to come through and small companies will be a big part of that.
Wall: Gervais, thank you very much.
Williams: Thank you.
Wall: This is Emma Wall for Morningstar TV. Thank you for watching.
