The IT UK Smaller Companies sector has delivered stellar returns over the short-, medium- and long-term, but Beal (pictured) says this area of the market is becoming even more attractive as managers and directors of smaller companies realise the benefits of paying out their cash reserves to investors via dividends. The manager is expecting a relative sell-off in the small cap space in the near-term, but urges investors not to worry as it is poised to deliver strong performance in the medium- to long-term.
"Smaller companies are recognising the importance of returning cash to shareholders via dividends, offering investors the opportunity to diversify their sources of income," he explained.
"However, given the share price performance of the sector in recent months, we may see a period of consolidation, particularly if further problems arise in Europe and the US in terms of public finances."
"That said, longer term, UK smaller companies offer investors both the opportunity for capital growth but also, importantly, income."
"The financial strength and potential of many smaller companies is in stark contrast to the huge level of public sector debt and the anaemic economic growth outlook."
"Whilst the structural problems of the UK economy will take some years to resolve, many smaller companies will continue to expand, due to the quality of their management, sound balance sheets and exposure to overseas markets."
Beal has managed the £91m Dunedin Smaller Companies IT since December 2005, returning 124.7 per cent over his tenure.
The FTSE Small Cap ex ITs has returned just 25.08 per cent in this time.
Performance of fund vs index since Dec 2005
Source: FE Analytics
Dunedin Smaller Companies has also been less volatile than the index over the period.
The trust is geared at 2 per cent and is currently trading on a 3.5 per cent discount. It has an ongoing charges figure of 0.98 per cent, but also has a performance fee.
Only three UK small cap trust have returned more since Beal took over, including Mike Prentis's BlackRock Smaller Companies IT and Neil Hermon’s Henderson Smaller Companies IT.
Prentis is also optimistic about the outlook for small caps and believes 2013 could be another strong year.
"Looking forward, the challenge will be to achieve growth in a relatively slowly growing world economy," he explained.
"The companies that can achieve this will see their share prices do well."
"There are many UK-listed smaller companies that fall into this category: vibrant companies run by strong managements focused mainly on organic growth, often with world-leading products or services sold at good margins and generating attractive cash-flows."
"These are the companies we like to invest in."
"We expect 2013 will also see a recovery in mergers and acquisitions activity, and that some overseas-based corporates will use part of their substantial cash resources to bid for the quality smaller companies you can find listed in the UK."
Hermon says he is finding better long-term opportunities in the mid cap area of the UK market.
"I place a great deal of importance on the quality and consistency of the stocks I buy. In my view, the best-quality stocks are concentrated in the FTSE 250 area of the market – hence my mid cap focus," he said.
"When running a large trust, it is very important that the underlying stocks have a good level of liquidity."
"Once again, by hunting in the mid cap area of the market, we are able to achieve this. We remain disciplined in our pursuit of quality and I would expect many of these stocks to grow into large-sized companies in the coming years."