Looking at where the experts have chosen to invest their cash is a tried and trusted method for retail investors to find investment ideas, particularly in the under-researched Smaller Companies sector where fundamental growth can be mispriced by the market.
Investing directly in equities in the FTSE AIM Index, while being more risky than using open-ended funds, gives investors the best chance of unearthing a gem whose price can rocket.
"Smaller companies have better potential for growth and tend to focus on very specific areas rather than the diversified range of business adopted by larger companies," said Richard Hunter, head of UK equities at Hargreaves Lansdown.
"There are also some inherent risks. Small caps tend to have less established track records and much wider spreads, resulting in increased volatility."
Ten most-held stocks in UK Smaller Companies sector
| Stock |
% of small cap funds holding this stock |
% of small cap funds that held stock 1 year ago |
| RPC Group |
10.26 |
3.85 |
| Oxford Instruments |
8.97 |
3.85 |
| Devro |
6.41 |
1.28 |
| Fisher (James) & Sons |
6.41 |
3.85 |
| Chemring Group |
5.13 |
3.85 |
| Euromoney Institutional Investor |
5.13 |
0 |
| Senior |
5.13 |
3.85 |
| Vectura Group |
5.13 |
2.56 |
| Emis Group |
5.13 |
5.13 |
| Abcam |
5.13 |
6.41 |
Source: FE Analytics
According to data from FE Analytics, RPC – the rigid plastic packaging manufacturer – is held by more than 10 per cent of funds in the UK Smaller Companies sector, including FE Alpha Manager Giles Hargreave’s top-performing Marlborough Special Situations portfolio.
"RPC is the market leader in rigid packaging in Europe and has an excellent management team," commented Hargreave, whose fund has a 1.5 per cent weighting to the company. "It has strong pricing power because it has invested in the technology to create innovative products, such as the resealable Heinz fridge pack for baked beans."
"The company will benefit from falling polymer prices and continuing structural change as plastic packaging increasingly replaces materials such as metal and glass."
Fellow Alpha Manager John McClure also holds the stock in his Unicorn UK Income fund.
A year ago RPC was held by only 3.85 per cent of small cap managers, but since then it has become one of the most bought companies in the sector. Over the last three years it has returned 227 per cent, compared with 68 per cent from the FTSE AIM Index.
Performance of stock vs indices over 3-yrs
Source: FE Analytics
Oxford Instruments is the second most widely held company, with almost 9 per cent of small cap fund managers exposed to the stock. Our data shows that 16 open-ended funds list it in their top-10 holdings, including the £398m BlackRock UK Smaller Companies, headed up by FE Alpha Manager Richard Plackett.
Mark Slater’s sector-leading MFM Slater Growth fund, in UK All Companies, also owns the stock.
"Oxford has transitioned from being a science-led business to one that is IP rich but very commercially focused," said Slater. "It is a leader in high technology instruments, with half its turnover related to nanotechnology, a fast-growing area which is a priority for R&D spending."
"We like the fact that the business is in growth areas and the management has plenty of levers left to pull in terms of margin enhancement and bolt-on acquisitions. The company is debt-free and the forward PE of 14 is undemanding in relation to the likely growth rate."
Over the last three years Oxford Instruments has returned 363 per cent.
Performance of stock vs indices over 3-yrs
Source: FE Analytics
Devro, based in Scotland, provides collogen products for the food industry. It is characteristic of a smaller company with industry-leading expertise that provides access to a niche area that has few competitors.
The company is held by nine UK-domiciled funds, including the £1bn Artemis UK Special Situations portfolio headed-up by Derek Stuart and Ruth Keattch. Over the last three years Devro has returned 286 per cent.
Performance of stock vs indices over 3-yrs
Source: FE Analytics