One of the more surprising departures during Gartmore's rapid fall from grace last year was that of Gervais Williams. During his 17 years with the company he had become synonymous with its range of smaller companies funds. But six months later, and having decided he no longer wanted to be part of a larger fund management group, Mr Williams is back on the front line of investment management with small Alternative Investment Market-traded fund management group MAM Funds.
Mr Williams is relishing the challenge of being a big fish in a smaller pond. "I met a large number of businesses, but MAM Funds was the best opportunity. There is no point in being part of a really big company. At MAM we can inject some change. We want to remove the roadblocks and energise and enthuse," he says.
He has been installed as managing director, but the core duties of running the overall MAM business will fall to executive chairman Ian Dighe, who joined the business at the same time. Mr Williams' real job will be managing the soon-to-be-launched Diverse Income investment trust.
First, though, he has to help raise the first £50m of investment capital. And while the fund's remit is broader than his historical small-cap focus, one part of the sales pitch will be familiar: income from smaller shares. He expects the portfolio to be heavily weighted towards the small-cap universe.
Gervais Williams
"A lot of equity income funds are over-concentrated in the larger companies. We might hold Vodafone, but it will only be 1 per cent of the fund," explains Mr Williams, who has long believed that the typical income fund investor's perception of small-cap companies as high-risk, high-growth companies that don't pay dividends, is inaccurate.
He also thinks that smaller shares are going to get the re-rating they deserve. "There has been a fault line in the small-cap world and small caps have underperformed, but this will normalise. Capital will be reallocated towards smaller companies. Also, a lot of the growth in the Aim market has been skewed towards the oils and metals companies, but there are companies out there with strong balance sheets and substantial prospects," he says.
The recession, and the rationing of credit, focused companies on their operations and meant they had to concentrate on cash generation and profitability, improving their ability to pay dividends to investors, who themselves have also pressed companies to return more cash through dividends.
Healthy smaller companies also often find themselves with a small number of significant investors who can put more pressure on the board to increase their dividend payouts, and this is something Mr Williams intends to engage in. "One of the advantages of investing in smaller companies is to have conversations with the people at the coal face rather than those three or four levels below the top management."
The Diverse Income Fund will target companies with decent dividend yields and those that have the ability to grow their dividend payouts. Mr Williams says: "A large number of companies are under-distributing capital. If we are going into a period of slower growth, then the need for good and growing income will be a growing feature of the market. There are many companies that could afford to pay a decent income yield but don't yet do so. However, in times of lower growth they may switch to a stronger dividend policy."
| GERVAIS WILLIAMS CV |
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| Gervais Williams joined MAM Funds as managing director in December. He was previously head of smaller companies at Gartmore, which he joined in 1993. He boasts 20 years' fund management experience in smaller companies. Prior to 1993, Mr Williams spent three years at Thornton Investment Management. He also spent five years at Throgmorton Asset Management as a director. He graduated from the University of Liverpool in 1980 with an Honours degree in Engineering. |
Like his Gartmore funds, the Diverse Income Fund will invest in a wide range of stocks, holding between 80 and 120. The sample portfolio that has been running during the process of setting up the fund has, using a bottom-up investing approach, been 10 per cent invested in large caps, 25 per cent in mid caps and two-thirds in small cap, fledgling and Aim stocks. The intention is for the underlying portfolio to pay out a 4 per cent yield to investors.
In terms of sectors, Mr Williams is keen on traded goods and industrials, which he believes have suffered from long-term price pressure over the past 25 years and competition from emerging markets. "This may turn with inflation rising in the emerging markets themselves. This is making domestic traded goods and industrials more competitive. There is product substitution in home markets as well as the opportunity for sales into emerging markets," he says.
While small-cap income may not be everybody's cup of tea, Mr Williams has a substantial track record of success in the small-cap arena; indeed, his best-performing Gartmore portfolio over the last five years he was managing there, the Gartmore Growth Opportunities Fund, returned 47 per cent compared with a 13 per cent return for its benchmark. And if Mr Williams is to be believed, he is not alone in recognising the income opportunities among small caps - even Invesco's renowned income investor Neil Woodford has been buying smaller caps recently.
