Fund manager says UK smaller company valuations are ‘artificially depressed’
Thursday 29 Aug 2019 Author: James Crux

Truly long-term investors with a 10-year time horizon should see issues such as Brexit as opportunities, according to Matt Cable, manager of the Jupiter UK Smaller Companies Fund (B3LRRF4).

Valuations for many UK smaller companies are ‘artificially depressed’, he says, meaning Brexit clouds do have a silver lining for stock pickers seeking to buy quality companies at attractive prices.

Cable points out that since 1955 the Numis Smaller Companies Index has outperformed the FTSE All-Share by 3.3% per year and is also the only open-ended UK equity sector to beat the All-Share since the Brexit referendum.

Investors are currently giving the UK smaller companies sector a frostier reception than its large cap peers, says Cable, but he thinks this is a mistake because the UK small cap space ‘should be considered a truly long-term asset class’ and short-term volatility should be expected.

‘While the knee jerk reaction to macro shocks such as Brexit, trade wars and other such headline-stealing geopolitical issues may be to sell, in my view this short-term volatility should be embraced.’

Macro noise is also creating valuation anomalies and means ‘many solid, quality companies are undervalued when viewed through a long-term lens’ according to Cable. He looks for undervalued companies that can demonstrate positive fundamentals, and where he can pinpoint the reason why the stock is mispriced.

His fund’s holdings include recruiter SThree (STHR), trading at its lowest price-to-earnings ratio valuation for more than 10 years due to concerns around Brexit and global growth generally.

Cable believes SThree is incorrectly perceived to be more domestic than it really is, at just 15% of revenue. ‘The market may also be ignoring fundamental characteristics of the business that should make it more resilient than some peers; notably its emphasis on contract rather than permanent recruitment and its focus on structurally growing niches in science, technology, engineering and mathematics disciplines,’ he adds.

The fund also has an investment in ticketing technology firm Accesso Technology (ACSO:AIM), which traded on a high rating until last summer.

‘A new CEO realised they needed to invest more to get the platform ready for the next phase of growth but this meant lower short-term profits which spooked the market and led to a dramatic crash in the share price,’ explains Cable.

He added the stock to the fund in July and it has subsequently receive a number of approaches, prompting the company to put itself up for sale.

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