The Investor 89

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THE INVESTOR | 25
Matthew Stylianou
price volatility in the short term,
but that volatility is only relevant
for short-term investors.The
performance of small companies
over the long term has compensated
for those short-term risks.
Larger companies can also be
slower to react to changes in their
marketplace, and they may have
fewer opportunities for growth,
relative to their size. Many recent
seismic events, such as the 2008
banking collapse and various
ill-judged acquisitions, have
affected large companies.
We control the risk through
diversification: I have between
100 and 120 small-company
investments.A portfolio run by one
manager across all company sizes
would be very unlikely to have that
many. A standalone small-company
portfolio may also be forced to sell
at the worst time – for example,
when sentiment turns against the
part of a multi-manager
structure of the fund, the UK
Smaller Companies element is
removed from that pressure as we
can choose where in the portfolio
we buy and also employ
positive screening, so we allocate
less capital to those areas where the
risks are at their highest.
INTERVIEW
There are 124 oil and gas companies
in our small-cap universe; we
narrowed this down to nine that
have a strong financial position,
from which we expect to make
attractive returns over the next few
years.These include Cairn Energy,
Ophir Energy and
also like the gaming sector, which is
hugely cash-generative and has a
long-term upside from the opening
of the US to online gaming.
What are the key factors
that youwill look at before
decidingwhether or not to
invest in a company?
There are three key factors we
consider: are the market’s
expectations of future profit realistic?
Are the shares good value, available
to buy and trading at a decent
discount to the company’s true
value?And is the company generating
shareholder value? The latter can be
achieved through recovery of the
company after a difficult period, or
through management change,
because it has the ability to sustain
above-average growth, or because it
has a high return on capital.
Small companies are
perceived as higher risk
than larger ones. How
do you control riskwithin
your portfolio?
It’s easy to make the assumption
that small companies present a
higher risk than larger ones: they
have less access to finance, they are
usually less diversified and there
will be less liquidity in their shares.
That means there is usually greater
The past few
years have been
particularly strong
for small company
shares