Fund focus: Small firms…but the chance of a big return


Fund manager Jonathan Brown believes the second half of this year should prove fruitful for investors in UK smaller companies. 

The manager of stock market-listed investment trust Invesco Perpetual UK Smaller Companies says a strong recovery in the UK economy should drive equity prices higher in the months ahead. 

But he warns that longer term, any rise in interest rates or a significant uptick in inflation could dampen the optimism. 

The £211million fund invests in companies that comprise the bottom ten per cent of the UK stock market by size. These are businesses with market capitalisations of £1.5billion or below – although if a holding proves a successful investment, it will continue to be held irrespective of its size. 

The trust has no unquoted stakes and steers clear of companies with market capitalisations below £100million. It does this, says Brown, for liquidity reasons. ‘We like to be able to sell a stock if we change our mind about it,’ he adds. ‘You can’t do that with an unquoted company or one that is too small.’ 

It also has no borrowings, unlike other investment trusts which use the loans to increase their exposure to stock markets. ‘UK smaller companies is a volatile asset class,’ says Brown. ‘Borrowing just adds to that volatility.’ 

Currently, the fund has some 80 holdings, which is on the high side. Brown says this is due to an abundance of investment opportunities and a desire to run a well-diversified portfolio. ‘There’s a lot out there that excites us,’ he says, ‘and we want a slice of it. But equally, we don’t want huge positions in any one stock.’ 

Since the pandemic struck, Brown and his deputy Robin West have changed the emphasis of the portfolio away from technology-related stocks to companies involved in leisure – primarily because many leisure stocks had been oversold and stood at irresistible ‘silly valuations’. Companies that have been brought into the portfolio – or where positions have been added to – include Gym Group and Hollywood Bowl Group. 

‘Gym Group is benefiting from many people wanting to get fit after lockdown,’ says Brown. ‘As shops close on the high street, it’s also been able to find lots of quality space to open new gyms. 

‘Similarly, Hollywood Bowl is finding plenty of premises to open new bowling alleys.’ Last month, the company confirmed it had agreed terms on a new ten-pin bowling centre at Resort World in Birmingham – as well as a golfing venue (under the brand Puttstars) in Harrow, North West London. 

Among the trust’s biggest holdings are media company Future that has benefited from an increase in demand for digital content – and language translation specialist RWS. Both companies have proved successful investments and the managers have banked some of the profits. 

The trust’s performance numbers are satisfactory. Over the past year, it has generated an overall return of 57 per cent. This compares to a 19 per cent return from the FTSE All-Share Index over the same period. Longer term, the trust has also significantly outperformed the index.

One attractive feature is its income bent. It pays dividends quarterly and aims to pay an annual income equivalent to four per cent a year. This was not possible last year because of the impact of the pandemic on UK company dividends, but it is very much an intention this year. The fund’s annual charges total 0.91 per cent and the stock market identification code is B1FL3C7.