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Sector Watch: Support Services

Daniel Lane

Daniel Lane - Fidelity Personal Investing

If you’re having a hard time thinking of the big names in support services, I can’t blame you. The sector is full of companies providing basic products like food packaging or services like office cleaning; the type of thing that flies below the radar and we only really notice when it’s not there.

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The result is that the key players in the sector don’t often get the limelight but for many investors that’s the point. Supporting a range of large companies who, in turn, sell products and services to end users means the initial auxiliary businesses are often a step removed from the fortunes attached to the final step, good or bad. They’re not the firms that strive to deliver knock-out blows, they’ll happily refill the water bottles instead.

Services like freight or distribution give an end company one less thing to worry about and the more trusted they become, the more integral to the overall operation they can prove. Of course, the overall success or failure of partner businesses will decide the longevity of the relationship but for many big firms, as long as they exist, they will need the invisible companies behind the scenes plugging gaps and helping them get on with the day-to-day.

No news is good news

Silence is often a measure of success in the less glamorous side of business. As long as firms can rely on their support services to hold up their side of the bargain, be it cleaning or labour recruitment, contracts can be renewed for years.

Long contracts with stable businesses can be quite sticky, meaning support companies can build high barriers to entry which can attract investors’ attention. Quality of service and reputation can hold a lot of weight here and the best firms will be able to fulfil the next contract with the same quality as the last one, all while realising their own growth prospects.

What should investors look for?

Scaling a support services business demands management who can allocate capital efficiently, manage the overall portfolio and maintain quality no matter how big the company gets. Consistency is key.

While they’re not usually household names, support firms can get there very quickly if things go awry. Examples of mismanagement, as in the case of Carillion, show how important it is to recognise the capabilities of the company and manage finances to ensure steady growth, rather than overextending resources.

What’s a good way to invest in support services?

For investors looking for direct access to the sector, the UK market has a range of names focused on different parts of the support service economy. The FTSE 250 is home to security firm G4S, with the FTSE 100 featuring construction equipment rental specialist Ashtead Group and distribution and outsourcing provider Bunzl. Credit checker Experian and professional recruitment firm Robert Walters are two other names on the UK market, showing the breadth of the sector’s reach.

For investors more comfortable with a diversified approach, a mutual fund could be a more suitable way to approach the sector.

The Liontrust UK Growth Fund, part of the Fidelity Select 50, names the largest contract food service company in the world, Compass Group, in its top ten holdings. Also in the Select 50, the Franklin UK Smaller Companies Fund holds AIM-listed Restore plc. Restore focuses on documentation management, with operations including shredding and recycling.

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. 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. Select 50 is not a personal recommendation to buy or sell a fund. This fund invests 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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