Marina Bond, manager of Rathbones Smaller Companies fund tells MoneyWeek where she'd put her money now.
Concerns over weakening economic growth in the US and a consumer slowdown in the UK have caused jitters across global equity markets, leaving smaller companies struggling to maintain their performance relative to safe-haven' large caps. But investors should be wary of rushing for the door, given that the smaller end of the market continues to offer attractive long-term growth opportunities.
Sentiment may be an issue at the moment, but if investors are looking for earnings growth, they can't ignore the small-cap arena. That said, even strong companies can't always buck a persistently weak trend in the climate in which they operate, so those operating in difficult industries are probably best avoided for now.
With this in mind, we have been focusing on quality and fundamentals, looking at strong management teams in areas backed by Government spending. A relative newcomer to the public arena is Carter & Carter (CART), a specialist provider of outsourced services to the automotive industry.
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At first glance, this may appear to conflict with the strategy of avoiding companies operating in difficult industries. However, the bulk of the firm's profits come from providing training to 16 to 19-year-olds on behalf of automotive manufacturers. Demand for qualified technicians is rising due to the increasing technological complexity of cars and an ageing existing technician base. Furthermore, the Government views this as a way of encouraging young people into the workplace, and provides 85% of the funding for the colleges that Carter & Carter runs.
Another one we like is Goals Soccer (GOAL), which floated on Aim last year. Goals provides new-generation five-a-side football facilities and is run bKeith Rogers. Rogers founded and sold the current market leader, Powerleague, which is also now looking to float. Goals' cash-generative characteristics and high barriers to entry make the financial model extremely attractive. More recent new issues have not had such successful debuts. However, that makes this the time to pick out the quality companies listing from the raft of questionable ones and take advantage of any share-price weakness.
Visual Defence (VDI) has drifted since its float, but with national security growing issue, its digital surveillance solutions are proving a good alternativto analogue systems. The order book is growing rapidly, with Bell Canada recent sign-up.
One of the joys of investing in the smaller end of the market is the possibility of picking up stocks that have not yet reached peoples' radar screens. One of these is Crosby Capital Partners (CSB), an investment banking and asset-management business with a focus on Asia.
The firm has a good track record of identifying undervalued businesses, raising capital from its own Asian and Middle Eastern network, and then realising value from the assets. The deals are complex and take time to complete, but barriers to entry are high. The recent flotation of oil production and exploration company Lodore Resources is an example of such a deal, and one where Crosby retains a significant stake in view of the value still to be unlocked in the assets.
Behind this merchant-banking division is a fast-growing fund management arm that is tapping liquidity coming out of China. This sort of stock is not for the faint-hearted, but as deals are announced it becomes easier to appreciate the value of the assets it is sitting on.
