Important information: 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.
Large, wide-reaching multinationals are part of our everyday lives because we use their products and understand what they do. They tend to attract the attention of the news channels and general public because of their size and social relevance, and analyst teams the world over are watching them as well.
But quite often that’s the problem - everyone’s looking at them. Finding an edge in the major indices can be tough because the volume of research going on means spotting something different requires either luck or immense skill.
But look further down the scale to some of the mid-size companies and suddenly the opportunity set grows. Mid cap companies’ obscurity relative to their larger peers means they are scrutinised by fewer research analysts, have fewer investors, and experience lower trading volumes, meaning there can be bigger differences in what the market says they are worth and the value analysts have in mind.
Here are three funds on the Select 50, focused on hunting for value in the mid range.
Schroder US Mid Cap
Exploring less well-known parts of the market is a central facet of the Schroder US Mid Cap Fund, run by manager Robert Kaynor.
The manager aims to provide capital growth and income by investing in US companies in and around the bottom 40% of the North American equity market, as measured by market cap. This is where Kaynor allocates at least 70% of the fund’s assets, as he tries to identify compelling companies mispriced by the wider market.
To equip the fund for different market conditions, Kaynor looks at three types of company. The bulk of the portfolio is composed of ‘mispriced growers’ – firms he believes will realise and sustain a significant change over the next two to three years, and whose impact is not appreciated by the market.
These names are complemented by ‘steady eddies’, demonstrating resilient revenue streams and low sensitivity to changing economic conditions.
The smallest allocation is to turnaround opportunities, which at most comprise one fifth of the total portfolio. For Kaynor, struggling companies deserve a look only when there is a genuine catalyst for recovery.
Companies currently in the fund’s top ten holdings include global drug delivery technology provider Catalent, and packaging producer Berry Global. If you haven’t heard of them, remember that might just be the point.
Threadneedle UK Mid 250 Fund
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.
These are companies beyond 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, these are established businesses whose shares enjoy good levels of liquidity, removing one of the risks of investing in even smaller companies.
At this size, one might assume these firms’ fortunes are hitched to the fate of the UK economy, but this is often the myth of the mid tier. Around 50% of revenues in the FTSE 250 come from outside the UK - tapping into domestic firms’ expansion can lead to a gear change says manager James Thorne.
“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 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.”
When it comes to running the fund, Thorne and co-manager Philip Macartney try to establish the likely course for future earnings in prospective portfolio additions. Thorne says: “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.”
CRUX European Special Situations
Crux European Special Situations has a bias towards small and mid-cap stocks listed in Continental Europe. Manager Richard Pease ideally looks for mid-sized companies generating above average growth in niche areas, but that the wider market has ignored.
He particularly likes when these businesses make sensible bolt-on acquisitions to complement their organic growth. He emphasises the importance of patient company management, capable of delivering a long-term growth strategy.
Co-manager James Milne again points to the attraction of medium-sized companies with a presence beyond their home markets. He explains: “We try to avoid domestic plays so we tend to have either global or pan-European businesses, just because if something happens in the politics or the economics in one area it will affect 100% of a domestic business.
Recurring revenue streams are top priority for the Crux team, and while there’s no inherent sector bias in the fund, bottom-up fundamental analysis tends to lead them towards European service businesses operating beyond their immediate borders. That said, there are areas the managers feel less comfortable contemplating.
Pease explains: “We tend to avoid the very capital-intensive companies - oil, steel, cement, things like that. They have to spend a lot of money, and then of course the rules might change in the countries they spend their money in and you risk losing your capital. We tend to focus on capital-light service businesses, which are much easier to grow and can give you a decent dividend en route too.”
More on Schroder US Mid Cap Fund
More on Threadneedle UK Mid 250 Fund
More on Crux European Special Situations
Important information: 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. Select 50 is not a personal recommendation to buy or sell a fund. 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. These funds invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. 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.
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