An economic recovery is taking root in the UK, reflected in both improving consumer and business investment, according to Ralph Cox, manager of the BlackRock UK Smaller Companies Fund. Lower oil prices are expected to provide a boost to the economy, while the deflationary impact of cheaper energy could make it more likely that policymakers will delay raising interest rates.
Ralph Cox is particularly positive in his outlook for UK and US consumers. This is reflected in a number of the fund's holdings which he believes should be beneficiaries of improving consumer confidence, with the additional benefit from the low oil price.
The main themes that currently feature in the portfolio are outlined below:
|Consumer confidence trending better||The fund is exposed to domestically-facing UK companies with unique franchises, benefiting from a strong trading backdrop and/or further rollouts.||Retail and leisure companies feature here, including Ted Baker, Dunelm, Howden Joinery, Restaurant Group and Cineworld.|
|Business confidence slowly improving||This could result in a pickup in business spending and an end to some corporate earnings downgrades.||Stocks within this theme include IT services companies such as Computacenter, and advertising firms such as 4imprint.|
|Recovering global construction activity||Some domestic and globally-facing companies are seeing a pickup in their end market users, combined with self-help initiatives to improve profitability.||Direct beneficiaries include Bovis Homes and Kier Group, while indirect beneficiaries include Northgate, a commercial vehicle hire business.|
|UK smaller companies are constant innovators||New technologies and services generally emerge first in the smaller companies arena.||Stocks include MyCelx Technologies, which provides water treatment solutions, and Tungsten, which provides services including electronic invoicing delivery.|
Over the past year, the fund has outperformed its benchmark, the Numis Smaller Companies plusAIM (exc. Inv Trusts) Index, though it has underperformed the IA UK Smaller Companies sector. The main positive contributors to performance included real estate company Workspace, while document storage specialist, Restore, performed well after announcing an acquisition of a competitor.
While the fund also benefited from limited exposure to the oil & gas sector, some of the biggest individual detractors to returns were all victims of the collapsing oil price. This included oil producers such as Ithaca Energy and specialist wellhead provider Plexus. Due to the higher risk nature of smaller companies some holdings will inevitably struggle or fail and therefore a long term horizon is essential.
Our view on this fund
Ralph Cox has been a member of BlackRock's UK smaller companies team since 2002. In August 2007 he became co-manager of the fund with Richard Plackett, and has been lead manager since November 2010. Since becoming co-manager, the fund has outperformed both its benchmark* and the sector average; though please remember this is not a guide to future returns.
|Annual percentage growth|
| Mar 10 -
| Mar 11 -
| Mar 12 -
| Mar 13 -
| Mar 14 -
|BlackRock UK Smaller Companies||49.9%||-3.9%||20.7%||27.8%||-2.6%|
|IA UK Smaller Companies||33.9%||1.0%||17.8%||31.5%||-2.6%|
|Numis Smaller Companies plusAIM (-InvTrust)||30.5%||-0.6%||14.3%||25.4%||-4.8%|
Past performance is not a guide to future returns. Source: Lipper IM* to 02/03/2015
Our analysis suggests the manager has added some value through stock selection as well as sector positioning. He also has the support of an experienced UK team at BlackRock. The UK smaller companies sector is, however, home to a number of talented stock pickers with lengthy track records. As such, we will not currently be considering the fund for inclusion on the Wealth 150 list of our favourite funds across the major sectors.
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