Companies: CSLT    FENR    FSTA    MTC   

The UK Emerging Companies Fund is an open-ended investment company (OEIC) and is managed by Aberdeen’s Pan-European Equities team. Although its benchmark is the FTSE Small Cap Index, there is no specific sector bias, according to investment manager Bertie Thomson, with a variety of areas mined for potential holdings. As a result, the fund retains a level of diversity. ‘Our current holdings are from a range of sectors,’ Thomson says, ‘but they all have attractive values and asset backing, which is what we tend to look out for.’

Identifying value

Thomson explains that the fund management team is on the lookout for stocks that will be a good store of value for investors. The team’s bottom-up approach means entire sectors are not necessarily ruled out, but rather pockets of value are identified and exploited. For instance, Thomson points out that although the general retail sector is not without its issues at the moment, one of the fund’s top holdings is Mothercare. The high street chain was in fact listed as the fund’s top stock in the manager’s latest monthly report, making up 2.9 per cent of the holdings.

‘The leisure sector also contains some interesting opportunities,’ Thomson says. ‘We hold a number of pubs that have stable, growing revenues and are increasing the diversity of their food and drink offerings. They seem to be dealing with the smoking ban well.’ Fuller, Smith & Turner is one such company and again comprises 2.9 per cent of the fund’s holdings in the latest monthly report.

Steady returns

Companies in the industrials sector make up more than a third of the fund’s holdings – 39 per cent – especially those involved in niche areas. Thomson elaborates, ‘We have liked industrials for a while now and hold a few niche engineering companies that we like a lot, such as Fenner and Cosalt. Both are in the general industrial sector, but Cosalt is currently restructuring from a conglomerate to a specialist in marine safety.’

Cosalt had proved a pretty steady stock, until the end of 2006 when its share price began to climb, rising from 269p to a mid-May high of 485p during the six-month period to 31 May 2007. ‘We have an investment horizon of three to five years,’ Thomson says, ‘so we look for a slow and steady return. But there are dramatic risers among our holdings, Cosalt being a prime example.’

In general, Thomson’s approach to the fund is relatively straight-forward. ‘We want to buy businesses that we can understand, and obviously those with attractive prospects,’ he says. ‘We look for companies that are run by people we feel we can trust. There are a lot of companies that sound great out there, but you need to know where that’s coming from.’

To ensure the stocks continue to provide value for investors, the team keeps a close eye on the various holdings, including conducting visits. ‘We visit our holdings at least twice a year,’ Thomson says. ‘We aim to hold between 35 and 75 stocks. We probably visit at least 100 companies per year in order to find the right balance.’

In terms of the small-cap sector, Thomson is unsure of whether the performance gap between it and the FTSE 250 will close this year, but he believes that steady returns
are indeed in store for investors in this area.