Most investors holding UK smaller companies are told that 20-25 companies is enough to achieve a diversified portfolio. Even experienced small-cap investor Lord Lee only holds 40 stocks.
But Mike Prentis, manager of the strong performing BlackRock Smaller Companies Trust (BRSC), an IC Top 100 Fund, has more than 150 UK smaller companies in his portfolio and has still managed to outperform the FTSE Small Cap index (excluding investment companies) every year for the past 10 years. He says this reflects his approach to stock selection and risk diversification. "People talk about having their best bets concentrated," he says. "But I don’t think that works so well. It’s better to be diversified."
He says that geographical exposure is one factor that is key to performance.
"UK companies are not necessarily dependent on the UK market," he explains. "You can get exposure to all parts of the world. So I can flex the portfolio depending on which part of the world is more attractive from a growth point of view.
"A few years ago you would have seen an emphasis on emerging markets in the trust. Over the last few years we’ve had more exposure to the UK."
Companies with emerging markets exposure that he used to hold in the portfolio included Rotork (ROR) which manufactures products to manage the flow of liquids, gases and powders, steam systems specialist Spirax-Sarco Engineering (SPX) and Spectris (SXS) - a supplier of productivity-enhancing instrumentation and controls.
Mr Prentis predicts a gradual move for the portfolio of the trust back to more exposure to EM in 2-3 years’ time. He recently bought events and exhibitions group Tarsus (TRS) which operates around the world but mainly in the emerging markets. “They were downgraded recently due to their currency exposure,” he says. "It’s not a big holding but shows how we operate."
Mike Prentis CV Mike Prentis is manager of BlackRock Smaller Companies Trust and co-manager of the BlackRock Throgmorton Trust. He is a member of the UK Equity Team at BlackRock. Prior to joining BlackRock in 2005, Mr Prentis worked at 3i in both their asset management and private equity businesses. He has a degree in geography. |
Today, a big theme in the portfolio is UK recovery. This includes exposure to housebuilders such as Bellway (BWY). "I’m a really big fan of Bellway," he syas. "It’s a really well run housebuilder at the more affordable end of the housing market. We did take a bit of profit when the shares rose above £16." That happened in January - the shares now trade at 1408p (29 April 2014).
He also likes estate agents Savills (SVS) and Foxtons (FOXT). "Savills is a big global brand and a very well run company with lots of strings to their bow," he says. “They are active in Asia, China and Hong Kong but not that big in the United States.
"Foxtons is more London-focused. It floated six months ago and has a very clear strategy. It generates a lot of cash and is a source of special dividends. It’s the sort of firm that will gain share and has the sort of people you want on your side."
He also has invested in firms that will benefit from UK consumer confidence. "House prices going up makes people feel more confident," he says. His investments in Howden Joinery (HWDN), Topps Tiles (TPT), Lookers (LOOK) and Restaurant Group (RTN) are all plays on consumer confidence. “Howden Joinery make over 20 per cent of kitchens in the UK - the sort of kitchen that will be fitted by your local builder. They can make them cheaply in Yorkshire. The business has done well over quite tricky times in the last 3 years," he says.
Mr Prentis is wary of food producers. "They sell to UK supermarkets which are all having a bad time," he says. He only holds one food company: soft drinks maker Nichols (NICL). “They own Vimto, which is sold in the UK and internationally - in the Middle East and lots of African countries," he says. "The return on investment capital is very high."
He also avoids companies that are exposed to the public sector. "Public spending pressures are intense," he says. "If you are seen to be overearning by supplying the public sector then it’s dangerous." The exception to his rule is his investment in construction, services and property specialist Kier Group (KIE). "It is a sensibly run business supplying the private and public sector. It provides good service and value for money"
The most recent theme Mr Prentis has been putting money into (over the last three months) is recovery in continental Europe. "Over the next 5 years we could see a decent recovery," he says.
His holdings for this theme include: insulation and roofing materials giant SIG (SHI), Industrial parts distributor Brammer (BRAM) and heat-treatment specialist Bodycote (BOY). "SIG and Brammer both have sales in the UK as well as continental Europe, while Bodycote is an international company but big in France," he says.
