f his career. He also draws on the talent of Investec’s seven-strong Four Factor UK Equity team, and previously trained at two very good houses: He completed stints at T. Rowe Price and Invesco before signing on with Investec.
Although management has changed here, the broad process hasn’t. Rodrigs continues to apply the same bottom-up approach to stock picking which emphasises four factors that narrow down the small-cap universe. His screen first seeks to identify companies that appear undervalued, are generating returns above cost of capital, with favourable earnings expectations and whose share prices are already on the rise. He combs through the firms that meet these criteria, performs a detailed analysis of their fundamentals, and meets with senior company executives.
The resulting portfolio is well diversified across industry sectors, but tends to dip down the market cap ladder more than the norm for the category -- the fund’s average market cap is 214million, compared with 270million for its typical rival. In recent years, the screens have also strongly tilted the portfolio more towards higher-growth stocks, as is evident by the above average projected sales, cash-flow and book value growth rates of the fund's holdings.
Those biases didn't all work to the fund's advantage in 2007. For example, its smaller-cap bent and light weights in energy and mining shares dented it late in the year, as did a large position in construction related issues. Even so, Rodrigs positioned the fund well enough to beat his average Morningstar peer in the period.
Overall, the early results of Rodrig's tenure are encouraging. He has bested the FTSE Small-Cap index during his brief tenure here to 31 March 2008 by 10 percentage points, and his peers in the Morningstar UK Small-Cap Equity category by 3.8 percentage points. Also, for those who think the fund might have been even better under Hanbury, it's worth noting that Rodrigs had outperformed River & Mercantile UK Equity Smaller Companies--which Hanbury comanages with Richard Staveley--by 3.7 percentage points from that fund's launch in November 2006 through 31 March 2008.
In all, we believe Rodrigs’ experience researching small caps, consistent style and strategy, and the fund's relatively resilient nature are much more important factors. It's always difficult when a name manager like Hanbury leaves, but Investec and Rodrigs have given investors reason to stay with this offering.
