Gervais Williams, manager of CF Miton UK Smaller Companies Fund (GB00B818N094), explains why he likes smaller companies operating in a specific niche, such as William Sinclair Holdings (SNCL). The company is listed on the Alternative Investment Market (Aim) and supplies horticultural products to retail and professional grower markets.
"As world growth has slowed, investors have started to appreciate that some smaller companies are well placed to sustain growth because they are involved in new structural growth markets," says Mr Williams. "Many smaller companies should be able to take market share from larger businesses given their superior service levels. Both of these trends may help smaller companies to outperform other quoted stocks.
"We select stocks that we believe have the most upside potential in terms of capital returns. The most common theme is one-off situations that fall outside sell-side research coverage, for example companies operating in a specific niche where trading can remain resilient through management actions regardless of the wider economy. William Sinclair is one such example."
Despite a difficult year to 30 September 2012, when William Sinclair's profit before tax and exceptional items fell to £0.26m from £3.18m the year before, the company is set to benefit from the scarcity of peat.
Its chairman said: "We are confident in the company's strategy and firmly believe the fundamentals are in place for a secure future. We lead the industry in peat-free products and have accelerated our investment in this to try to lessen the impact of bad weather. We have the lowest cost base in the industry and all these factors should lead to a return to an acceptable level of profitability just as soon as conditions return to normal."
"We anticipate that many smaller company funds will start to reallocate capital from mid-cap holdings to smaller quoted stocks which could drive up the valuations," adds Mr Williams.
