British small caps have demonstrated remarkable resilience, outperforming blue chips over the past year. Fuelled by a surge in takeover activity, investors’ interest in the sector has ignited – yet stocks remain materially undervalued. With a backdrop of anticipated interest rate cuts and a new government committed to stability, we believe the stage is set for investors to capture long-term growth in this asset class.
Our focus is on this “sweet spot” of UK equities. By taking significant stakes in our holdings, we can use our private equity expertise by engaging with firms’ boards to support value creation. This approach enables us to curate a concentrated portfolio of exceptional companies in structurally growing sectors.
British small caps: a wealth of opportunity
The UK wealth-management sector is a burgeoning market, underpinned by robust structural growth drivers including rising household wealth, a persistent advice gap and supportive government policies. Despite the sector being “out of favour”, well-positioned businesses that can weather the storm will emerge stronger as inflation cools and interest rates decline, stimulating positive fund flows.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Brooks Macdonald (Aim: BRK) is a prime example. Its recent transformation and investment initiatives have positioned it for robust asset growth and improved profitability as market conditions improve. While we do not base investment decisions on potential takeover speculation, note that the sector’s consolidation is driven by private equity’s interest in high-quality businesses at attractive valuations. This dynamic provides a degree of downside protection. However, we anticipate that the market will eventually recognise the company’s exceptional qualities, leading to a substantial rerating of its shares.
The UK residential lettings market is experiencing several favourable long-term trends. These include the challenge of home-purchase affordability (exacerbated by elevated interest rates), the relative lack of new construction and the depressed supply of rental stock.
The Property Franchise Group (Aim: TPFG) has just become the UK’s largest franchised multi-brand estate agency group through its merger with Belvoir Group.
TPFG generates its revenue by collecting franchise fees in exchange for a suite of support services, which provides TPFG with a highly attractive and resilient earnings profile throughout market cycles. In addition, as UK residential housing sales volumes begin to recover, TPFG is well placed to benefit through its sales and mortgage-broking exposure. Green shoots of this cyclical recovery are evident, with TPFG reporting a 16% like-for-like increase in its pipeline of agreed sales in June 2024, marginally ahead of the 15% recorded for the wider UK residential housing market.
Costain Group (LSE: COST), a leading infrastructure engineering and consultancy services provider, should capitalise on several tailwinds. The state’s substantial £700 billion infrastructure investment pipeline over the next decade presents ample growth opportunities across Costain’s core markets of transport, water, energy and defence. Furthermore, the increasing emphasis on sustainability aligns perfectly with the company’s record of delivering positive environmental and social outcomes.
The adoption of industry best practices, as outlined in the government’s Construction Playbook, is shaping the market in a way that favours Costain’s expertise in risk management and operational excellence. Costain’s strong balance sheet provides scope to invest in growth initiatives and navigate potential industry challenges.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Rachel Reeves delivers Spending Review: what does it mean for your money?Chancellor Rachel Reeves’s Spending Review will see some departments’ budgets rise, but others won’t be quite as lucky. We look at what has been announced, and what it could mean for your money.
-
Divorce financial settlement fights surge – why it pays to agree terms earlyLawyers expect more court battles as tax rises and sharp falls in asset values make divorcing financially more difficult.
-
Who’s driving Tesla?As Elon Musk steps back from government with his eyes on the stars, investors ask if he’s still behind the wheel at his electric-car maker.
-
Investment opportunities in the world of Coca-ColaThere is far more to Coca-Cola than just one giant firm. The companies that bottle and distribute the ubiquitous soft drink are promising investments in their own right.
-
Streaming services are the new magic money tree for investors – but for how long?Opinion Streaming services are in full bloom and laden with profits, but beware – winter is coming, warns Matthew Lynn
-
'Pension funds shouldn't be pushed into private equity sector'Opinion The private-equity party is over, so don't push pension funds into the sector, says Merryn Somerset Webb.
-
Greg Abel: Warren Buffett’s heir takes the throneGreg Abel is considered a safe pair of hands as he takes centre stage at Berkshire Hathaway. But he arrives after one of the hardest acts to follow in investment history, Warren Buffett. Can he thrive?
-
Who will be the next Warren Buffett?Opinion There won’t be another Warren Buffett. Times have changed, and the opportunities are no longer there, says Matthew Lynn.
-
Will Comstock crash – or soar?Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.
-
'As AGMs go digital, firms must offer a new form of scrutiny for shareholders'Opinion Technology has rendered big AGM meet-ups obsolete, but the board still needs to be held to account, says Matthew Lynn
