Investments  

Profit growth is small caps’ ‘biggest challenge’

Ed Beal, the manager of one of the most successful investment trusts of 2012, has said the biggest challenge facing small companies is profit growth rather than accessing capital.

The £89.7m Dunedin Smaller Companies investment trust, run by Aberdeen Asset Management’s Mr Beal, was the top performer in the AIC Smaller Companies sector over six months, one year and three years in share price total returns terms, according to FE Analytics.

“In general the companies we see can get bank financing- it may not be for quite as long or quite as cheap as they would like, but liquidity is not the biggest issue,” the manager said.

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“There are concerns about whether companies can deliver growth over three to five years. Since the financial crisis, operating margins are close to peak levels and it would be optimistic to believe they can increase further.”

The manager said small companies did well over the past year as sentiment improved after European central bank president Mario Draghi’s summer pledge to save the euro from collapse.

Small-cap stocks have outperformed their larger counterparts in the past few years, with the FTSE 350 index having delivered higher gains than the FTSE 100 index over the five, three and one-year terms, according to FE Analytics.

Within Mr Beal’s portfolio, he hailed Oxford Instruments, which makes industry and research tools and was a 3.3 per cent holding in the trust as at November 30, as a positive contributor.

“Historically it was a sleepy little company run by academics but increasingly, scientists from the emerging markets insisting on having Oxford instruments to work with after using them here,” he said.

However, Chemring, which manufactures munitions and flares for the armed forces, disappointed. The trust very recently sold down its holding in the company after more than eight years, following a change in management.

“We have to look our investors in the eye and tell them our companies have strong balance sheets. It was a disappointing investment for a few years and acquisitions hadn’t integrated properly,” Mr Beal said.