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Growth Company Investor: Fund Manager Focus

Thu 14 Mar 2013

Fund Manager Focus

Rob St George meets the fund managers following three paths to growth.Toby Belsom and Robin West, co-managers of the Aviva Investors UK Smaller Companies fund, look for three types of small-cap flower to bloom, an approach that has served them well. In 2012, they posted a top-quartile total return of 24 per cent; over five years, they have delivered 77 per cent against their sectors average of 45 per cent.

The largest allocation in their portfolio, providing 70 per cent of the holdings, is to growth at a reasonable price (GARP)
picks.One such constituent is LSL Property Services, the parent of estate-agency brands including Your Move and Marsh & Parsons. The groups share price has risen by 18 per cent over the past year, and it has a modest forward price-to-earnings ratio of 12.1.LSL remained profitable through the downturn by being agile, focusing on letting rather than sales. As people cannot afford deposits, explains West, they have been forced into letting and that market has been buoyant. It is not as profitable as sales, but Belsom is prepared to be patient. It may be that housing transactions dont increase dramatically over the next 12 or even 24 months, but were happy to sit with the holding until that occurs, he says. When it does, LSL will emerge as the dominant player in the estate agency and surveying market.Where LSL provides cyclical growth, in the same GARP category Consort Medical delivers structural growth.
Although its share price has fallen by a fifth since it divested a unit late last year, West considers the sale to the firms merit.

Consort had not been actively trying to spin off the business, but acquiesced when the opportunity arose. Its a reflection of the quality of the management that they didnt mind selling part of the business when offered a price that fully valued it, feels West.The managers now foresee an acceleration in growth over the next few years as the companys new products exit the development process. In particular they point to a joint development with British American Tobacco subsidiary Nico Ventures on electronic cigarettes, which should benefit from regulatory concern over similar existing products.

The managers second classification, comprising 20 per cent of the portfolio, is of companies offering high growth but at a high price. An example is Digital Barriers, which already up 14 per cent in 2013 yet has never turned a profit and is not forecast to do so for years to come.The fund invested in the business to back its management, in the person of executive chairman Tom Black, who was boss of Detica until BAE bought it. Black has been busy snapping up enterprises with leading surveillance technology, then using his connections and expertise to create the sales infrastructure, specifically with state agencies.

Governments are going to have to continue to invest in the area, reckons West.He also admires Blacks gift for acquiring diverse technologies and packaging them into broader contracts for clients, although he thinks Digital Barriers is ready to move on from those formative steps. Largely, the buying part of the business model is complete and theyre now on to delivery, West concludes.The turnaroundsThe final 10 per cent of the portfolio is dedicated to special situations: firms with strong fundamentals that have been mismanaged but are poised for a change catalyst, such as new leadership.Cape, an oil-services group, meets these criteria after what Belsom terms a dreadful year. This was caused by a scattergun approach to acquisitions and a weak control regime.

But with Joe Oatley installed as the new chief executive he ran the engineering conglomerate Hamworthy until he sold it for 383 million Belsom is optimistic. It is not broken business, he comments, but one in need of tighter management and restructuring in parts and a refocus on what it did well originally.

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