Schemes urged to block overseas investors from snapping up UK small caps

Pension schemes should increase exposure to UK small cap companies to help grow the domestic economy and protect it from losing out to overseas private equity, according to a fund manager.

Speaking on a panel at the Pensions and Lifetime Savings Association’s (PLSA) Local Authority Conference yesterday (12 June), Victoria Stevens, fund manager at Liontrust Asset Management, said UK smaller companies could outperform the largest US listed companies over the next 20 years.

Stevens added: “Investing in UK growth is not a London-centric story. Investing in small caps means supporting businesses up and down the UK. They employ 70,000 people and pay £300 million in taxes to HM Revenue & Customs [annually] and generate £16 billion in revenue.”

She said recent merger and acquisition activity in the space was worrying for the future of domestic investment.

“Private equity overseas companies are taking our businesses from our stock market and taking them away at bargain basement prices,” the fund manager said.

“Both sides of the political spectrum have woken up to the importance of a thriving stock market.

“The UK’s largest pension funds invest just 2.7% in the domestic economy and that is putting our companies and our stock market at a disadvantage.”

Nick Dixon, head of pensions at the Avon Pension Fund, said the starting point for funds should always be the global equity index.

However, he added: “The small cap sector in London is an unloved sector in an unloved market. But unloved means good value and modest price earnings ratios means good value.

“The best indication is the price we pay today, so a low price is a catalyst for action.”

UK small companies have underperformed the S&P 500 index over the past 20 years, Dixon said, but predicted that this would change.

“In the next 20 years the AIM will outperform the S&P, [so] we should allocate more than 0.1% to it,” he said.

Stevens – who is part of a team managing six UK equity funds with £6 billion under management – said micro- and small-cap companies provided an opportunity for UK “over-allocation”.

She told delegates that £1 invested in micro- and small-cap stocks 70 years ago would now be worth £32,500, compared to £1 invested in large caps, which would have netted just £1,357.

“Investing in small caps means investing alongside owner managers, who still own a decent equity stake in their company,” Stevens said.

These owners tended to be quite conservative, she explained, with an average stake of 20% in their own company.

In addition, the fund manager said small companies were well advanced in selling their products to a global marketplace: 51% of small-cap revenue was generated in the UK, with the rest coming from selling products and services to the rest of the world.