JO Hambro Capital Management’s Mark Costar is holding the fewest amount of mid caps in his career, as “overcrowding” in the space has forced him to shift to smaller stocks.
Mr Costar has just six mid-cap stocks left in his £372m UK Growth fund, after typically holding between 15 and 20 out of a total of 50-60 positions.
He said mid-cap investors should now begin to exercise caution following a sharp rally for the space in recent years.
The FTSE Mid 250 index has increased more than 78 per cent in the past five years to October 13 2015, outperforming both the FTSE 100’s 32 per cent rise and the 72 per cent gain in the FTSE Small-Cap index, data from FE Analytics shows.
The manager said there had been “significant overcrowding in mid caps and under-crowding in small caps, which is a clear anomaly in the small-cap market place”.
Back in June 2012 the fund’s allocation was evenly split between mega-, mid- and small-cap stocks.
But since then Mr Costar has been gradually increasing small caps at the expense of his mid caps.
At the end of June this year small caps accounted for 39 per cent of his fund, with just more than 10 per cent in mid caps.
This minute allocation to mid caps is “just above an all-time low for the strategy and the lowest I have ever had in my career”, the manager said.
Some of his favoured small caps include information security consulting company NCC Group and finance and property firm Sigma Capital Group.
Meanwhile, the mining sector has piqued the manager’s interest and he has an overweight position in the category for the first time in a decade.
Mr Costar has purchased mining giants Rio Tinto and Anglo American, which he classifies as “unloved and misunderstood mega-caps”.
“We used to be ‘perma-bears’ on the mining sectors and said we would only buy the sector if the facts or valuations changed,” he said.
“That’s exactly what has happened – the facts have changed. If you look through the noise in the market you can find world-class assets.”
This “noise” resulted in commodity prices suffering a further collapse this summer, albeit followed by a slight rebound in recent weeks.
Mr Costar said there “was no significant correlation” between the equity values of commodity companies and the prices themselves.
He added the fall in the market was a “Darwinian cleansing of supply capacity as barriers of entry have gone up”.
Nonetheless, both Rio Tinto and Anglo American have been knocked by the slump in resource prices. The former is down 16 per cent this year, while the latter has fallen 43 per cent, compounding the poor performances in 2013 and 2014.
The JOHCM UK Growth fund has performed strongly in the past three years, returning 50.2 per cent – nearly double its FTSE All-Share benchmark’s rise of 26.7 per cent and the 35.4 per cent average return by the IA UK All Companies sector, FE Analytics data shows.
