Fund managers at the fussier end of the stock-picking spectrum are rapidly losing their appetite for companies with high exposure to government spending. George Osborne's stomach churning austerity drive means it will dwindle until 2018 at the earliest. If invested in companies like these, investors hungry for returns may be in for a long wait before they see anything even close to exciting.
That's why they're strictly off the menu for BlackRock's head of small caps, Richard Plackett. He says companies whose main customer is the government, such as construction companies, are currently some of the worst stock picks around. As a result, he's underweight even in pharmaceuticals - a sector also heavily reliant on government spending, even though healthcare budgets are rarely slashed.
His sustained success, he claims, is not down to radical trend-bucking investment decisions, but a sense of ramped-up rigour. You might think: "Anyone could say that", but Mr. Plackett's proof is in his performance, with his BlackRock UK Special Situations fund having been a first-quartile performer in its IMA sector (UK All Companies) over three years and maintaining a comfortable position in the second quartile over a 12-month period. It has also soared above its index consistently, outperforming it by 26.5 per cent over five years.
To have a shot at attracting even a scrap of investment from Mr Plackett in either of his funds, stocks have to fulfil five sturdy criteria. "If small companies meet them all, they are pretty special businesses," he says. And he allows no room for slacking. If a company fails to tick all five of his required boxes, he sends it packing.
Richard Plackett CV
Richard Plackett is head of the UK Small/Mid Cap team in the fundamental equity division of BlackRock's Portfolio Management Group. Mr Plackett manages the BlackRock UK Special Situations Fund (ISIN GB00B3R25W66) and the Throgmorton Trust PLC (ISIN: GB0008910555), and, until recently, he also managed the BlackRock UK Small Cap Fund (ISIN: GB0005811418).
After earning an MA in Economics from Cambridge University in 1985, he landed his first job in finance at 3i private equity. Mr Plackett then went on to work for M&G, where he managed the smaller companies and income fund teams, as well as heading up the entire UK investment process.
Then, in 2002, he joined Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006 and he has been with the company ever since.
Companies that "stick to what they're best at" are what Mr Plackett really wants. And those with solid focuses on products that lead the global market in their niche are his ideal picks. Victrex, the plastic maker, is one of his trophy stocks and takes pride of place within his top 10 holdings with a generous allocation of 3.1 per cent.
But he doesn't stop there. An investable company must pass a management appraisal, in which its movers and shakers will be tested for sales ability, control skills, strategy and equity involvement. It must then prove it has a strong market position. If this is not delivered by the product itself, it must prove it has an unrelenting supply network.
Next, it must possess the funds for its own expansion. Many companies struggled to do this during, and in the wake of, the financial crisis, and Mr Plackett admits: "My turnover of stock has been much higher over the past three years - as businesses have struggled to do this." And those that cannot will still be given the boot.
Then their track records have to be carefully unpicked - black spots in the past could indicate trouble in the future, so these are scrupulously avoided. And the final test is balance sheet strength.
"Ideally, companies will have net cash and no debt. And in an ever more competitive economic environment, the winners are pulling further away from the losers and the contrast between failure and success is only getting starker," he says.
It's a tall order, but there are, of course, companies that make the grade. He has held Aveva Group since he took over the fund, which still appears within the top 10 holdings in the BlackRock UK Special Situations fund. This list is not unusual, though, as it is littered with FTSE 100 companies.
The interesting make-up of the fund can only be seen when you look further into its smaller holdings. Around 30 of the fund's 50 holdings are invested in small- and medium-cap companies - and these are picked from a universe of around 2,000 companies. His favourites are Bovis and Bellway, the home constructors, which emerged strongly from the recession and continue to dominate their niche market. He also likes Ashtead, the rental equipment provider, as it has benefited from expanding its business to the US.
Mr Plackett says: "We may be in a slow-growth environment, but I don't want people to forget about UK equities. There are plenty of opportunities in small- and medium-cap companies that are just around the corner."
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