Miton Group’s US equity managers Nick Ford and Hugh Grieves have slashed exposure to small-cap stocks and retreated to large-cap holdings amid valuation concerns and uncertainty over the country’s economy.
The managers of the £142m CF Miton US Opportunities fund said the high valuations in small caps meant they needed to shift into larger, safer stocks and had been doing so in recent months.
Allocation to smaller caps had fallen by 19 percentage points since August 2015.
“Last year we started finding good opportunities in large-cap stocks,” Mr Ford said. “This is slightly unusual for us, because we have made a lot of money in small-cap investments.
“Valuations of small and mid-cap companies have grown quite large because they have become quite popular. We think there are far more attractive valuations in larger companies.”
In the past six months, the managers have increased their position in Coca-Cola – the portfolio’s biggest holding – and added fast-food giant McDonald’s, industrial giant General Electric and technology firm Microsoft into the fund.
This has come at the expense of smaller companies, with debt-collection firms Portfolio Recovery Associates and Encore Capital Group removed because of high valuations, along with payment-processing names Vantiv and Total System Services.
Mr Grieves noted that valuations had become “stretched” in the case of the first two names, adding: “Share prices have fallen since we sold.”
The small cap Russell 2000 is down 0.8 per cent year-to-date but fell as much as 14.2 per cent on February 11, before joining the equity recovery.
Mr Grieves believed Vantiv and Total System Services were “good investments” but had reached a “high” in valuations, while the large-cap additions showed signs of boosting returns.
“McDonald’s is seen as a low-growth global restaurant operator,” he explained. “It has got a much more dynamic and aggressive new CEO who is shaping it up and making a much more exciting, better-tasting menu, cutting costs and making the restaurant more appealing.”
Similarly, the managers favour Coca-Cola for abandoning a quest to simply “sell more litres of Coke” in favour of boosting revenues.
At the end of February, small- and mid-cap holdings represented just 24 per cent of the fund. This figure was as high as 43 per cent in August last year.
However, while predictions come true and investors launch a run on smaller stocks leading to better valuations, the managers are awaiting greater certainty about the strength of the US economy before returning to their favoured space.
“The valuations are not as attractive as they used to be but, with the Russell 2000 underperforming, valuations are getting more so,” Mr Ford said.
“But we need to be a bit more confident that the US economy is going to be more resilient. There have been concerns about a global recession – that would not provide a good backdrop for small and mid caps.”
Mr Grieves noted that the tide could be turning for smaller companies.
“At some point in the next year or two, smaller companies will have their time in the sun,” he said. “That’s going to be very exciting for us.”