Smith is fundamental stock picker targeting fast growing companies with clear competitive advantages. He applies a long term approach to investing, as reflected by the fund’s low
turnover. In the 12 months to July 07 portfolio turnover was 36%, which is an unusually low figure for the sector.
Smith’s defensive qualities are also evident from the way he constructs his portfolio. There are some 140 stocks in the fund, reflecting his caution towards riskier stocks, such as biotechs where he takes a ‘basket’ approach (smaller positions in many stocks), and new holdings can start off quite small. Smith is also mindful of a stock’s market capitalisation, and to an extent, proportions his holdings on this basis, which ensures adequate portfolio liquidity. However, given the manager’s belief in running his winners, some stocks can end up as quite large holdings. For example, Smith has invested in Northgate and Fenner for more than ten years and they now represent over 4% of the fund.
It’s rare to find a small cap manager as experienced as Smith and his record stands the test of time. Of the 16 funds in the UK Small-Cap Equity category which have performance data going back to 1990, Lazard UK Smaller Cos (1990- June 2002) is the clear winner. And Invesco Perpetual UK Smaller Companies Equity (July 2002 – October 2007) is ranked 31st percentile and has one of the lowest volatility records.
The fund isn’t without its risks. Smith’s cautious approach may result in him missing out on shorter term opportunities, and sometimes he is slow to sell. More recently he was caught out by the fall-out in the property sector. Also in bull markets the fund is likely to lag the top performers.
Overall though, Smith follows a disciplined approach and among small caps, this is the kind of fund that should offer some comfort to the more nervous investor should markets take a significant turn for the worse.
