"What is really clear is, overall, the aggressive de-rating of UK listed smaller companies has been far in excess of any reported weakness in trading," says Bell.
"This has been painful for market participants to endure since the beginning of 2022 but has undoubtedly meant there is currently a wealth of opportunities for investors in the asset class."
Taking advantage of low valuations
The fund manager has been active at topping up existing holdings “beaten up” from a valuation perspective and has taken the opportunity to add new holdings at attractive long-term entry points.
Eustace Santa Barbara, co-manager of the IFSL Marlborough UK Micro-Cap Growth fund, has also been deploying cash to add to existing positions in companies he says look significantly undervalued – and strongly positioned to bounce back when the economic backdrop and investor sentiment improve.
“What the sell-off has done is create what we believe is a very attractive valuation opportunity,” Santa Barbara says. “We believe the case for well-managed, high-quality UK small caps, and their ability to outperform slower moving corporate giants over the long term, remains as strong as ever.”
For example, he has been increasing his investment in Volex, which supplies specialist cabling used in charging points for electric vehicles, healthcare facilities and data centres, in addition to providing power cords for consumer electronics.
Volex recently reported solid full-year results, with strong revenue growth and higher profit margins, and Santa Barbara says it has “outstanding” long-term growth prospects.
And even currently stressed companies could be coming out through the other side, and bringing with them attractive opportunities for UK small-cap investors.
Unicorn’s Game certainly sees it that way: “As inflation continues to moderate and the hiking cycle comes to an end, the sectors that have been hit especially hard, like construction and building materials, which are close to trough earnings and valuations, should perform particularly well in the early stages of a market recovery,” he says.
With the recent easing in headline and core inflation, the decision by the BoE to pause the rate hiking cycle at the September committee meeting, and upwards revisions to GDP that suggests the economy is performing better than expected, we could finally have a near-term catalyst for improved investor returns for UK small caps.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre
