Small CapsJul 31 2017

James Henderson: Why now is the time to buy UK small caps

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James Henderson: Why now is the time to buy UK small caps

Veteran investor James Henderson, manager of the £102m Henderson Opportunities investment trust, said he sees significant value in UK small caps, as other investors shun the sector amid fears over the impact of Brexit.

Mr Henderson said the market’s wariness of investing in UK small caps on the basis they are predominantly exposed to the UK domestic economy is his reason for there being value in small caps.

“There are times when there is no value in UK small caps, and that is when we sell, but is definitely value there now,” he said.

The FTSE AIM All-Share Index, consisting of all companies quoted on the Alternative Investment Market, has risen 28 per cent over the last 12 months.

The fund manager said he takes the view “it doesn’t matter to me whether the companies happen to be listed on the AIM market, or are small caps listed on the main market of the London Stock Exchange".

Currently a significant portion of Mr Henderson’s small cap exposure is in shares listed on the AIM, he said.

He said that there is a “popular belief” in the market that AIM shares only offer exposure only to the UK economy.

But the fund manager said “investing in AIM can expose you to international as well as domestic end-markets, and a wide variety of niche sector specialisms”.

Mr Henderson added: “Amid election and Brexit uncertainty some investors have been put-off small-caps, instead opting for the perceived safety of larger internationally exposed companies in the FTSE 100.

"Caution is fair. The necessary Brexit shock absorber of a weakened pound has served to import inflation and threaten domestic spending in the short-term; and clearly business uncertainty surrounds negotiations with the EU and what this will mean for the UK economy.”

He continued: “Many of the UK’s youngest and brightest star companies start on AIM...due to its less onerous rules on listing.

"It comes with risks of course: lighter touch regulation; greater share price volatility; poor liquidity (the ease in which you can buy and sell shares in larger amounts); concentrated revenues on fewer product lines; concentrated end-markets for sale.

"But if you’re comfortable with taking a bit more risk, capital returns on AIM can be significantly greater than that of the larger FTSE100 listed stocks."

He said it’s much easier for a small-cap to transform revenues of £10m into £100m, then it is for a larger firm to turn £1bn into £10bn.

"It is this potentially strong growth of earnings that translates into stellar share price returns.”

The Henderson Opportunities Trust trades at a discount to net assets of 19.5 per cent.