Smaller companies were some of the prime beneficiaries of last year’s positive sentiment with the average fund in the IMA UK Smaller Companies sector returning 37.18 per cent in 2013.
However, due to various factors such as investors taking profits after strong gains, concerns about interest rate rises and growing macro headwinds, small-caps have struggled in 2014 with the sector losing 0.10 per cent year to date.
Williams, whose £160m CF Miton UK Smaller Companies fund has topped the sector since its launch in December 2012, understands why his area of the market has underperformed but he doesn’t expect it to be a long-term trend.
Performance of fund vs sector since Dec 2012
Source: FE Analytics
“It’s rested a bit recently, but I’m still red hot small-caps because I think we can make a lot of money from them,” Williams (pictured) said.
“Expected economic growth in the UK doesn’t look as buoyant as previously thought and there are concerns about interest rates. These things can influence investors and people have been thinking perhaps small- caps won’t do as well.”“However, one of the beauties of smaller companies is that they can deliver high levels of growth even when economic growth is muted.”
Williams fully expects smaller companies to outperform their larger rivals over the medium term and has been using the recent period of weakness to top his exposure to a number of his favourite stocks.
Here, Williams highlights three stocks which he thinks will deliver the goods over the coming few years.
Regenersis
Regenersis, the FTSE AIM-listed support services company, is Williams’ largest individual holding making up 4 per cent of his total portfolio.
Shares in the mobile and consumer electronics repair company have been broadly flat in 2014, but the manager has been increasing his position following its recent acquisition of Blancco’s data erasure service.
“New EU data protection legislation has been implemented which means that businesses have got to make sure that information about individuals isn’t just left in a rubbish dump. They have to use a process, like Regenersis’, that makes sure, belts and buckles, they are completely clear.”
According to FE Analytics, shares in Regenersis have returned close to 400 per cent over three years compared to the FTSE All Share’s return of 51 per cent.
Performance of stock versus index over 3yrs
Source: FE Analytics
Though the company only has a market cap of £265m, it is quite a popular stock with fund managers.
Six count it as a top 10 holding, including the likes of AXA Framlington UK Smaller Companies and FE Alpha Manager Giles Hargreave’s Marlborough Special Situations fund.
Sprue Aegis
Williams’ second largest holding is Sprue Aegis, which is also listed on the FTSE AIM index.
He has been adding to his position in the £150m company which means it now makes up 3.3 per cent of his CF Miton UK Smaller Companies fund.
“I have also bought some more Sprue Aegis, which provides smoke detectors and carbon monoxide detectors.”
“It has enjoyed some strong trading recently following new French legislation which is far clearer on carbon monoxide detection. It’s seen decent growth from France, which seems odd because the economy has had a tough time recently.”
“It’s just another example of how small-caps can grow even though the economy isn’t.”
The company only floated on AIM in March this year. According to FE Analytics, the stock has returned 18.28 per cent since its first day of trading.
The Coventry-based business is a market leader in smoke and carbon monoxide technology and is a supplier to the likes of Tesco, British Gas, B&Q and Wickes.
Williams’ CF Miton fund is one of only three portfolios that count Sprue Aegis as a top 10 holding.
The other two are CFS Balanced Opportunities and the five crown-rated PFS Downing Active Management fund.
K3 Business Technology
Though he doesn’t count it as a top 10 holding, Williams has also been buying shares in K3 Business Technology, which has a market cap of just £68m and is listed on the FTSE AIM index.
“K3 is a software business that is heavily involved in supply chain management products especially for the retail sector,” Williams explained.
“It has been seeing rapid growth recently as their clients are looking to take full advantage of the introduction of the new Microsoft Dynamics AX coding. If anything there is a skill shortage in this area as there aren’t enough staff who are trained in this area so K3, which have one of the best products to use AX, are getting lots of extra orders.”
“They are capacity constrained which means they can get great margins and every additional AX staff member recruited will add extra growth too.”
According to FE Analytics, shares in K3 have performed very well this year and are up more than 50 per cent. However, as the graph below shows, its performance has been relatively flat over recent months.
Performance of stock in 2014
Source: FE Analytics
Williams says that the stock isn’t cheap at the moment on its current P/E of 20 times, but that only relates to a year that finished in June.
Its projected P/E is 13 times making it a great investment, according to the manager.
