Investing in Small Caps: Insights from Artemis Fund Manager Mark Niznik
Introduction
Artemis fund manager Mark Niznik has gone all in, placing his entire retirement portfolio into his own small-cap funds, despite a decade of lackluster performance in the sector. This bold move raises questions: is investing in small-cap equities still viable, and what strategies should investors consider?
The Current Small-Cap Landscape
Small-Cap Performance Under Scrutiny
According to FE Analytics, the IA UK Smaller Companies sector has struggled significantly over the past ten years, returning just 74%. This performance trails behind both the IA UK All Companies and IA UK Equity Income sectors, which ranked as the second and third worst in the Investment Association universe.
A Decade of Financial Instability
Since the Brexit referendum, political uncertainty has led to investors withdrawing a staggering £6 billion from small-cap funds. This trend reflects a broader issue dating back to 1997, when pension funds reduced their UK equity exposure remarkably from 53% to a mere 4%.
A Contrarian Stance
Mark Niznik’s Confident Decision
Despite the challenging backdrop, Niznik is confident about small-cap investments. “People think I’m nuts,” he admits, “but I’ve done this because I believe I’m going to make lots of money.” His rationale hinges on several factors, particularly the need for market stability and promising growth prospects.
Potential Benefits of UK Small Caps
With increased instability in U.S. markets and a historically high price-to-earnings ratio of 22x, Niznik posits that international investors may begin to shift their focus back to UK equities. He notes, “A few scraps from the giant U.S. investor table heading this way could really boost UK smaller companies.”
Signs of Change
Positive Indicators in the Market
Niznik points out encouraging trends, including an uptick in share buybacks among companies in the Artemis UK Smaller Companies fund, as well as a notable number of takeovers at attractive premiums over the past six-and-a-half years.
Emerging Stability in Domestic Politics
He acknowledges the current Labour government, led by Keir Starmer, for bringing a degree of stability, which could enhance investor confidence in UK markets moving forward.
Investing Wisely: Niznik’s Approach
Key Investment Principles
While Niznik emphasizes his personal investment strategy, he offers pivotal insights for other investors looking to navigate the small-cap space:
-
Prioritize Companies with No Debt: Focus on firms that maintain a clean balance sheet, thereby reducing financial risk.
-
Target Sustainable Growth: Seek out companies that are not only growing but are also leaders in their niche markets.
-
Invest in Profit-Making Firms: Avoid companies that accumulate debt to scale their operations. Niznik describes this preference as “boring,” but one that aligns perfectly with his investment philosophy.
Spotlight on Promising Stocks
Niznik highlights three stocks that adhere to his investment criteria:
-
Mony Group (Moneysupermarket): This company utilizes its SuperSaveClub to create recurring revenue streams, trading at a P/E of 11x and boasting a 9% free cash flow yield.
-
Mears Group: A firm maintaining long-term contracts with local councils, Mears trades at a P/E of 9x and has an 11% free cash flow yield, alongside 15% of its market value in cash.
-
Moonpig: The online greetings card leader shares a significant market presence, trading at a P/E of 13x and yielding 9% in free cash flow.
Conclusion
While Niznik’s strategy of investing solely in small-cap funds may not be for everyone, it serves as a compelling reminder to reconsider this often-overlooked segment of the market. As financial landscapes evolve, the potential for returns within the small-cap arena could present attractive opportunities for discerning investors.
