Small cap manager Dan Nickols is targeting less popular sectors that he believes can outperform the wider market’s expectations.
The manager of the £124.2m Old Mutual UK Smaller Companies Focus fund said he thought the underperforming telecommunications sector and construction businesses could provide opportunities for him.
Performance in the two areas has been weak in the past year, with the FTSE All-Share Construction and Materials index losing nearly 11.1 per cent in the past year, while the equivalent telecommunications index has lost 7.5 per cent, according to data from FE Analytics.
The manager said his fund relies on three constant themes – structural growth, UK domestic cyclicality and self-help. However, he said the stocks and sectors that power these themes could be about to change.
Mr Nickols said the sector most likely to produce structural growth at present is telecommunications.
He has increased his weighting to the sector, which now makes up 2.4 per cent of the fund. While this is a small increase from the start of the year he noted it gave him ample room to increase his exposure.
The manager said to gain better access to the UK domestic economic cycle, he was now focused on buying building and construction stocks.
Mr Nickols recently purchased Breedon Aggregates, a supplier of building materials; Galliford Try, a UK construction business; and Marshalls, a stone and concrete supplier. Galliford is now in Mr Nickols’ top 10 holdings, making up 2.3 per cent of his portfolio.
However, the UK construction sector is somewhat scrutinised at the moment. It expanded at the slowest pace in five months in October. The latest Purchasing Managers’ index (PMI) from Markit showed a reading of 61.42 in October, down from 64.2 in September. A reading above 50, however, does denote expansion.
Mr Nickols remains optimistic. “These stocks have been on a prolonged downturn, but they are beginning to turn up and this will be a multi-year expansion,” he said.
Elsewhere, Mr Nickols’ “self-help” company of choice is SSP, which had its initial public offering (IPO) in July.
He defines a self-help company as one that has undergone management change or internal development that would lend itself to improved stock performance.
SSP operates almost 2,000 retail concessions at airports and train stations in 29 countries under new CEO Kate Swann, the former chief executive of WH Smith.
“She had a strong run at
WH Smith, she thinks outside the box and makes small changes,” said Mr Nickols.
The stock makes up 2.5 per cent of Mr Nickols’ portfolio, and he is considering adding more.
Mr Nickols has found a lot of new investments in the IPO market, and has taken part in nine IPOs this year. His latest buy was Fever Tree, the upmarket drinks provider, which listed its shares on Friday.
The number of holdings in the fund as at September 30
The size of the fund’s largest sector weighting – industrials – as at September 30