Small Cap Awards Nominee Profiles: Kames Capital UK Smaller Companies

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Small Cap Awards Nominee Profiles: Kames Capital UK Smaller Companies

As we approach the Small Cap Awards, due to take place on 25th June, Master Investor profiles some of the companies and funds shortlisted. Elaine Morgan, manager of the Kames Capital UK Smaller Companies fund, has been shortlisted for UK Smaller Companies Fund Manager of the Year award.

  1. Please provide a brief description of the fund.

The fund invests in the smallest 10% of companies on the market whether they be a newly listing IPO or an existing constituent of the FTSE250, FTSE Smaller Companies or AIM indices. The research process seeks out companies with a proven business model, a strong balance sheet, robust growth prospects and a stable or improving earnings forecast potential.

Our highly experienced and deeply resourced UK Equities team have extensive knowledge of the smaller companies’ universe. We construct our portfolios from the bottom-up, based on detailed fundamental analysis of each investment idea.

As active equity investors we believe that integrating a company’s ESG performance within our fundamental analysis is a tool for both value creation and risk management –  we view ESG integration as an alpha-generating layer of fundamental research.

  1. 2019/20 was clearly a strong year, to what do you attribute your success?

2019 performance was driven by stock selection. The biggest contributors to the Fund’s return were holdings in software company GB Group and telecommunications service provider Gamma Communications where share prices rose by over 80% in both cases, veterinary pharmaceuticals business Dechra Pharmaceuticals where the share price rose around 40% and specialist student accommodation provider Unite Group where the share price rose over 50%. GB Group and Dechra Pharmaceuticals also feature in the top 5 contributors over 5 years reflecting the fund’s investment in long term business potential.

As well as benefiting from long term winners in 2019 the fund benefitted from newer ideas. A top 10 contributor to performance was the holding in summer 2018 IPO, Knights Group. The legal firm was founded to take advantage of regulatory change in the sector and came to market with an established acquisition strategy and track record. Greggs also made it into the top 10. This was an illustration of seeking out recovery growth – where quality businesses may be undervalued due to short term factors and we expect earnings forecasts to recover.

  1. How would you characterise the long-term drivers for your fund?

Our work does not stop after we initiate a position in a company. When we invest in a smaller company we see it as entering into a partnership for growth. We regularly meet with the management of companies we invest in across our equities range which is perhaps even more valuable for our smaller companies’ holdings. Not only does this interaction help to broaden our understanding of the business and management’s vision but also enables us to actively support this vision. There are numerous instances where we have constructively debated strategy with company management, exerting a positive influence and where necessary providing capital to help them reach their next development milestone.

Essentially, we are looking for companies that can grow strongly to become the larger companies of the future. Our process seeks to identify these companies which can exhibit long term outperformance and to support them in their journey.

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