One of Giles Hargreave’s favourite lines is its easier to find a company that'll shoot up from £10m to £100m in value than it is to find one that'll go from £100m to a billion.
That's easy to say when you're a well-known small cap fund manager with four decades of experience under your belt and £800m under management - Mr Hargreave manages five different funds including his flagship Marlborough Special Situations Fund, Marlborough UK Micro Cap Fund, Marlborough UK Micro Cap Fund and Hargreave Hale AIM VCT fund. However, a through-the-keyhole look at Mr Hargreave's stock picking process reveals some golden nuggets for small and micro cap investors.
The biggest threats to small cap companies would come from falling demand as a result of the world going back into a recession, and conversely, rising interest rates as a result of inflation. But reassuringly he says the current reality is "somewhere in the middle of these two", a scenario he describes as "reasonably ideal". But if the balance were to tip, smaller companies, he says, are much more exposed to these dangers than large companies because they don't have the balance sheet strength to protect them.
Small caps tend to be more risky than large caps - that’s why you need a wide spread of investments including larger companies in your portfolio. But Mr Hargreave says the best way to mitigate the risk is to snap up companies operating in "niche situations".
He's talking about businesses that have carved such a unique specialism they exist free of competition. An example of one of his favourites is Iophena - the iodene producer. Clearly when Mr Hargreave says niche - he means - niche. The company found a new and cheaper way of producing Iodene in the US - creating plenty of demand which saw its share price climb from 20p to 180p.
"Things... happen with small caps", says Mr Hargreave. This is his way of explaining small caps are prone to disasters. Last week a company he holds announced its profits had fallen 40 per cent within a week thanks to a set of complex accounting rules. Mr. Hargreave seems vague as to how this happened and describes the drop as merely "very strange".
There's one sector in particular that gets Mr Hargreave particularly excited - and that's online. Online is an area he’s cashed in on in the past, and he’s confident he will continue to do well in the future. Asos, the online fashion retailer, is one of his darling stocks which he bought when it was worth less than £10m. Now its capitalised at nearly £3bn. He was first drawn to it because he liked its ambitious management that wanted to be the world's biggest online retailer - an aim they're now well on the road to achieving. It started on 50p and is now trading at £33 today - an extraordinary rise. To begin with its main target audience was the UK, but then things got really exciting when it diversified and went global.
He says online companies are more likely to tap into global markets than ones operating without a strong online facility. But this isn't always that important. UK based money website, Moneysupermarket.com, is one of his favourite holdings, although he says it is worried about rivalry from Google. He admits the biggest threat to investing in online companies is the fierce amount of competition from sites popping up here there and everywhere.
Unquoted companies worth less than £14m are much harder work though, he warns. The amount of due diligence required is considerably more than with small cap companies. This is because if something goes wrong - you don't have the quote to protect you. These companies may not reach market at all, and often end up worthless.
VIDEO: Watch Katie Morley interview Giles Hargreave, about how he spots golden opportunities in small, micro cap and sub-£14m unquoted companies here.
