Since it was set up in 1998, boutique manager Chelverton Asset Management has focused on listed and unquoted small and mid-cap companies. It remains a modest player, running around £480 million across two investment trusts and two notably successful open-ended funds.
The company's flagship fund is Money Observer Rated Fund PFS Chelverton UK Equity Income, which has over £400 million under management and an impressive track record; if you'd invested in the fund on 16 December 2011, your investment would have risen 100 per cent over that five-year period.
Its baby sibling, the PFS Chelverton UK Equity Growth fund, was launched in October 2014 and currently has just £12 million under management. But it has an equally impressive record to date, up 28.5 per cent over the past 12, notably challenging, months. This compares with a rise of 5.6 per cent for the UK all companies sector.
CASH GENERATION IS KEY
Manager James Baker, a small and mid-cap specialist of 30 years' standing (though a relative newcomer to fund management), says the fund is looking for 'sensible, cash-generative companies with a growth focus'.
To that end he and his co-manager David Taylor use a quantitative screening process to identify those businesses that are growing faster than the economy and can fund their own growth without having to borrow heavily or issue shares. Cash generation is key, Baker stresses.
The managers cast their net across both FTSE and Alternative Investment Market (Aim) listings. 'I don't have any reservations about Aim stocks - there are plenty of attractive companies that meet our criteria in there, just as there are on the main market,' he comments.
The screening process reduces the universe of around 1,100 small and mid-cap companies down to a shortlist of 250 that meet four out of the five quantitative criteria, from which Baker selects his portfolio of 50-70 stocks through meeting and getting to know the companies. He is looking for features demonstrating predictable sales and sustainable margins.
Thus, suitable candidates may have recurring revenues; he gives the example of technology businesses that focus on repeat orders and ongoing service contracts for their customers.
They are also likely to have strong inherent competitive advantages - for example media companies producing the 'must-read' publication for particular professions.
And the management must be shareholder-friendly, with 'a sensible strategy for asset allocation'; Baker is wary of businesses that use their cash to 'acquire companies at silly prices'.
The fund holds a broad range of sectors, and a mix of structural growth stocks and 'quality cyclicals'. Baker is naturally drawn to 'picks and shovels' tech companies that enable other businesses to profit from the internet or by adopting practical technologies.
One example is the fund's largest holding, Dotdigital, which produces packages to help small companies grow their online presence; another is call centre software firm Eckoh.
He also likes industrials where top-line growth is in evidence, citing the example of Volution, a ventilation systems manufacturer set to grow on the back of tightening environmental legislation for new buildings in the UK.
At present the fund pays a yield of around 2 per cent. Baker says: I don't mind income, but I'm equally happy if the cash is being reinvested for growth. I love companies returning cash as special dividends, because then I can reallocate it within the portfolio.'
Where do the managers see potential opportunities for the coming year? Baker emphasises that the fund's focus is primarily on structural growth companies that can prosper regardless of the wider economy.
However, he says, there may be cyclical potential in the home improvement market. 'We think we may see people doing more DIY on their homes, and also that the limited level of housing transactions may pick up.'
He therefore has an eye on holdings such as double glazing company Safestyle: 'It has been doing very well because it's been winning market share from the likes of Everest and Anglia, but if the market picks up it could do even better.'
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