IFAM: In the light of your answers to the previous questions, how are you positioning the portfolio to reflect those views and maximise the growth potential for investors?
JONATHAN BROWN: As I mentioned earlier, we favour stocks with “self-help” characteristics given the current low growth environment. By this, we mean companies with the ability to grow profits independently of the wider economy. This can include restructuring stories, where a fundamentally good business has lost its way, but has the potential to rehabilitate itself under new management. We also like businesses that have scope to roll-out a successful concept more widely, or companies that can consolidate a fragmented industry and derive a benefit from increased scale. We also seek companies that are exposed to higher growth niches within the wider economy. These niches are often too small to make a significant difference to a large cap, but can represent a very significant opportunity for a small business.
Our analysis is focussed on the sustainability of returns and profit margins, which are vital for the long-term success of a company. We continue to look for businesses with “pricing power” by assessing positioning within supply chains and having a clear understanding of how work is won and priced. It is also important to determine which businesses possess unique capabilities, in the form of intellectual property, specialist know-how or a scale advantage in their chosen market.
ROBIN WEST: In terms of the portfolio’s sector weighting, these are determined by where we are finding attractive companies at a given time, rather than by allocating assets according to a “top down” view of the economy.
Our portfolio currently has around 30% in Industrials, which is fairly typical for us. It’s a very broad sector and we find plenty of businesses with good margins and a clear competitive advantage. We also tend to be overweight compared to the wider small-cap market in the Healthcare and Technology sectors, where businesses are rich in intellectual property and the end markets offer good growth prospects. We are underweight Financials compared to the market, due to many of the stocks in this sector lacking pricing power and having a high degree of leverage.
The current period of heightened political risk has held back both investors’ appetite for smaller companies and reduced businesses confidence in investing for growth. We believe increasing clarity on these issues over the coming months, combined with historically low valuations could herald a golden period for the sector.
About Jonathan Brown and Robin West
Jonathan and Robin are the named portfolio managers of Invesco Perpetual UK Smaller Companies Investment Trust plc. Jonathan Brown is also the named portfolio manager of the Invesco UK Smaller Companies Equity Fund (UK) within the same strategy.