Small(ish) companies back on the radar?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

High street athleisure chain JD Sports shrugged off the wider woes of the high street this morning, posting double-digit sales and profit growth for the past year.

Small(ish) companies back on the radar?

Revenues jumped by 49% to the start of February at the sportswear store, bolstered by good performance from recent acquisitions Finish Line and Sports Zone, with profits before tax up over 15% to £355.2m across the board.

A growth darling for many UK fund managers especially over the past decade, shares in the firm hit an all-time high on the news, as executive chairman Peter Cowgill pointed to the company’s 37% compound annual growth rate in profit growth in the past four years.

It’s not what we’re used to hearing from the high street but the likes of Hotel Chocolat have already shown how differentiated and unique offerings are surviving at the expense of their more homogenous neighbours in town centres. Shareholders will be hoping a further acquisition of Footasylum will bring yet more growth without diluting the strategy that got the company this far.

Breconomics

Brexit has had us talking about the diverging fortunes of FTSE 100 companies and businesses further down the market cap scale, like JD Sports.  Conventional wisdom tells us that the more international FTSE 100, whose earnings mainly come from overseas, enjoys a falling pound whereas the domestically-focused companies in the FTSE 250 and below can think of nothing worse.

However, a weakened pound over the past few years hasn’t dented the trajectory of the second tier of UK companies when viewed with a long-term lens. One reason is that it’s not as domestic as we might have first thought. While the UK accounts for around 25% of the sales exposure of FTSE 100 companies, Britain and Northern Ireland only make up 50% of FTSE 250 companies’ sales1. JD Sports is a good example here, as the company has a meaningful presence across Europe and Asia-Pacific, with Finish Line giving the firm a route into the US.

And there are more myths to bust further down the market cap scale. Nearly half of all sales in the FTSE UK Small Cap Index come from overseas2. While the 2016 referendum broke what had been a relatively similar growth path for the UK smaller companies index and its global peer, the MSCI World Small Cap index, UK companies continued to report positive earnings results especially in healthcare and technology, waking investors up to the fact that even the small caps are internationally diversified when it comes to income streams.

Investors with a good knowledge of the small cap space will have taken this in their stride but due to regulatory pressures and shrinking analyst teams, quite often the lower end of the cap scale goes overlooked,  presenting huge opportunity for the bottom-up active stock pickers willing to look.

In the Fidelity Special Situations Fund manager Alex Wright gives a good mix of large and smaller-cap companies, drawing on his experience running the Fidelity UK Smaller Companies Fund. Currently, over 24% of the portfolio is allocated to opportunities in the FTSE 250, with 7% in FTSE Small Cap companies.

Going even further but with still in the IA’s UK All Companies peer group is the Threadneedle UK Mid 250 Fund. Managers James Thorne and Philip McCartney own a range of mid-tier names including Britvic and Domino’s Pizza with a view to capitalising on national and international growth.

Mark Slater’s Slater Growth Fund straddles the mid and small caps with a significant portion of the portfolio invested in the Alternative Investment Market (AIM). Names here include Canada-focused Peppa Pig producer Entertainment One, Chinese medical technology conglomerate Hutchison China Meditech and marketing technology firm dotDigital as well as Future, the Bath-based magazine publisher on the FTSE Fledgling index.

And right at the end of the spectrum lies the LF Miton UK Smaller Companies Fund run by Gervais Williams, with over 80% of the portfolio in AIM, including radiation detection firm Kromek.

If you’ve recognised fewer and fewer of these names the further you go down the scale, maybe that’s the point - active managers ready to explore the lower end of the size spectrum have the chance to turn up success stories where none of us think to look.

More on:
Fidelity Special Situations Fund
Fidelity UK Smaller Companies Fund
Threadneedle UK Mid 250 Fund
Slater Growth Fund
LF Miton UK Smaller Companies Fund

Source:
1Goldman Sachs Investment Management Research
2Royal London Asset Management Research

 

Important information

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