The Threadneedle UK Mid 250 Fund is one of a small number that focus on the gap between the very biggest and the smallest UK listed companies.
“I think the most important thing is that the mid-sized space generates the best returns,” I’m told by James Thorne, who co-manages the fund with Matthew Evans.
These are companies in their adolescence, having outgrown their start-up phase where the risk of failure is still high, but not yet mature and therefore still with room to grow. From an investor’s point of view, they are established businesses and their shares enjoy good levels of liquidity, removing one of the risks of investing in even smaller companies.
At that size, one might assume these companies’ fortunes are hitched to the fate of the UK economy, but Thorne says the market for mid-caps has plenty of global exposure, too.
He said: “In terms of breakdown of revenues in the index, the universe is about 50/50 - half overseas and half UK domestic, versus something like 70% overseas for the FTSE 100.”
Thorne said that many mid-sized companies are beginning to expand internationally, but may not have properly established themselves. Being on board when they do can lead to a gear-change in performance.
“A company may have grown organically into Europe, say, and may have bought a business in the US or Asia”, he explained. “They might say they are ‘global’ at this point but they aren’t really. They are more like four separate businesses, where HR and research and development are each conducted in their home territories without talking to one another.
“When these things come together so that there is one vision - for sales, for development, for hiring - then these businesses find their costs of getting to market dramatically reduce and they really can take off.”
Thorne and Evans also run a smaller companies fund at Columbia Threadneedle, something they say gives them an advantage. Thorne says: “We are small-cap managers who have moved up to mid-caps, rather than large cap managers that have come down. It means we are familiar with all the stages of development these companies face.”
When it comes to running the Mid Cap 250 fund, Thorne and Evans try to establish the likely course for futures earnings. Thorne said; “We have a clear philosophy. By doing fundamental analysis and understanding how a company operates and makes money we can establish what we think will happen to profitability in the future.
“We like businesses that invest for the future. Compounding, as we all know, is a very powerful tool for generating returns, and businesses that can invest in their future to allow that compounding are the sort that will find their way into the fund.”
The pair look for companies that can charge a good price for their product or services, Thorne said, with products that are defendable with competitive threats that are quite weak.
There is no particular style bias in the fund but Thorne added that there was a focus on valuations. This can mean companies that have had short term operational issues but which remain fundamentally good companies.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.