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Fund Manager Outlines the Risk of Investing in Smaller Listed Companies

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One of the most satisfying elements of building a portfolio for those actively investing online is uncovering the ‘hidden gems’ – companies that are not household names, investments of which turn out to be roaring successes. These ‘next big things’ can be happened upon in the ‘picks’ section of a newspaper, specialist stock market investing periodical, turned up by stock screening software of be a tip-off from a personal connection. Even if a small part of a portfolio, these picks often give the most pleasure and a sense of achievement.

However, one successful fund manager, John Chatfield-Roberts, who runs Jupiter Merlin’s multi-manager funds, warns that it is exactly this category of interesting small companies that has led to his and his team’s biggest mistakes. Chatfield-Roberts stresses on the fact that the problem with smaller companies that can provide great gains when all is going well is rooted in the lack of liquidity apparent in this kind of investment when markets or sectors turn.

In a recent interview in The Telegraph newspaper, Chatfield-Roberts says that the worst investment the Jupiter Merlin funds has made was in a fund called ‘Australian Natural Resources’ which invested in small, mainly Australia-based, mining stocks. The position is surmised as “we lived to tell the tale, but definitely did not cover ourselves in glory.” The problem is that the low liquidity, compared to bigger companies, that is an inherent quality of smaller companies means that while gains can be quick and steep on an upswing, losses follow the same pattern if market sentiment turns against a company or sector. Industries, such as mining and resources, are also very cyclical.

Another warning that Chatfield-Roberts has for those investing online is on the possible impact that the withdrawal of quantitative easing will have on equities markets in coming years:

“while we have got central banks continuing to print money there is mass distortion in the markets. Growth for companies is very hard to come by”.

While the Fed in the U.S. and Bank of England in the UK have stopped pumping money into the economy, the Central European Bank and Bank of Japan are still running major quantitative easing programmes. Chatfield-Roberts wonders “what will happen to the market when that funding is withdrawn properly”.

That concern also ties into why the Jupiter Merlin funds are now avoiding the smaller companies and emerging markets-focused funds they would have bought a year ago. The funds are now focused on liquidity in an effort to make their porfolios “bullet-proof” and “be able to sell assets in difficult times”.

Active stock pickers investing online might also do well to focus on improving the liquidity profile of their own portfolios.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul