Finding the next generation of UK growth companies

This article is part of
Guide to UK equities after the pandemic

 Finding the next generation of UK growth companies

While the UK stock market is devoid of household name technology companies of the type that dominate the US market, the domestic market has many tech businesses that are leaders in their respective fields, according to Alexandra Jackson, who manages the Rathbones UK Opportunities fund.

She says that while the US and China are leading the way in terms of businesses that utilise technology to sell to consumers, the UK has technology companies that sell to other businesses, and so, while they can be very successful, they tend to not be household names. 

Jackson says: “The UK is good at the nuts and bolts of making technology work, and the companies doing that are in many ways the future of the UK market.

"The issue is that right now those companies are not in the FTSE 100, and that's the market people know most about, but only about 1 per cent of the FTSE 100 is in technology. You have to go further down the market-cap scale and into the Aim market.”

She cites cyber security as an area where UK-listed companies are among the world leaders. 

Jackson adds that listing rules on the Aim make it easier for founders to retain larger stakes in the companies after the float than is permitted on the FTSE 100.

This makes floating on the Aim more attractive to technology entrepreneurs, but many funds do not invest in Aim shares due to it not being a recognised stock exchange. 

She highlights Aveva as a company of which few UK consumers have heard, but it is a technology company with its products used by the oil market in Abu Dhabi. Jackson says she has been invested in the company for many years, form when it was a small and mid-cap, but now it has been placed into the FTSE 100 – although it still has a very low profile. 

Chris Murphy, who runs the Aviva Investors UK Income fund, says the UK has many companies with structural advantages that are not presently appreciated by the wider market, but they are not necessarily technology companies. 

He says “There are areas of the UK market which have super growth, but it is not glamorous growth. I would highlight a company like Ferguson, which is in the FTSE 100; most of its business is in the US, and it sells plumbing supplies.

"With the recovery happening in the US there is a lot of growth to be had. I would also look at a company like SSE, which is a utility, and utility companies are not really viewed as growth, but SSE is turning itself into a renewable energy company, and that is a real growth area.

"Generally speaking, there are far more companies listed in the UK that are exposed to ESG themes than there are in other parts of the world, as ESG seems to have been a stronger theme here. A company like Smurfit Kappa would be an example of this – packaging is evolving to be more sustainable, and Smurfit Kappa will be a winner from this trend.”