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The secret ingredient for Lowland Investment Company
Buying smaller companies expands Lowland Investment Company’s opportunity set greatly. Here, the managers explain how they seek to benefit from smaller companies that others have overlooked…
9 Sep 2024
5 minute read
5 minute read
Key takeaways:
- We believe that the trust’s blend of small, medium and large companies has been a key contributor to performance.
- While smaller companies are often renowned for their experimental business models, those operating in less exciting industries can be overlooked.
- Smaller company valuations remain low, despite the UK economic picture notably improving.
Lowland Investment Company has always owned a mixture of large, medium and small companies. We believe the tilt away from large companies has been a key driver of Lowland’s performance. Good small companies growing into bigger businesses can fuel investment growth. But it is the type of smaller companies that is our secret sauce.
Surprisingly, it is not often the talked-about small company that achieves super charged growth. Rather, those that capture the growth we seek have usually been more pedestrian businesses providing basic goods and services.
The focus of many smaller company investors on the exciting new story creates the opportunity to add value and find the real gems in the perceived duller areas of economic life. Paying attention to stocks that other investors overlook is our goal. Once these forgotten stocks prosper they should attract investor attention because of the cash flows they generate, which could result in their share price going up.
The reason many investors are biased against this approach is that they believe these companies’ fortunes are tied to the UK economy. However, a good small company is not a proxy for the general economy. A strong management team would deal with the circumstances they find in the markets they serve. And a smaller company can be more dynamic and flexible in responding to change.
Over recent years the speed of change has resulted in the life cycle of companies becoming shorter. The large company with a seemingly established market position is there to be attacked by a fleet of smaller companies. The widespread availability of information being the internet has made ‘shopping around’ much easier. It is hard to stay at the top. This leaves investing in the next generation of companies even more important.
The UK economy is growing again after the shallow recession of last year. Interest rates are forecast to fall and companies have reduced their costs as a result of the difficult operating environment they have got through. When improving sales meet reduced costs company operating margins improve and cash profits accelerate. This is the position for many UK companies coming into 2025.
The smaller companies in the stock market do have more of their revenues coming from the UK. This has kept their share prices lower for a number of years but this could be changing. The wider economic picture in the UK appears more settled. However, the valuations of smaller companies do not yet reflect this improved outlook.
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There is no guarantee that past trends will continue, or forecasts will be realised.
Past performance does not predict future returns.
Glossary
Economic cycle
The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.
Free cash flow (FCF)
Cash that a company generates after allowing for day-to-day running expenses and capital expenditure. It can then use the cash to make purchases, pay dividends or reduce debt.
Market capitalisation (market cap)
The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size and is often abbreviated to ‘market cap’.
Share price
The price to purchase (or sell) one share in a company, not including fees or taxes.
Small caps
Companies with a valuation (market capitalisation) within a certain scale, eg. $300 million to $2 billion in the US, although these measures are generally an estimate. Small cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.
Disclaimers:
Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority), Tabula Investment Management Limited (reg. no. 11286661 at 6th Floor, 55 Strand London WC2N 5LR and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 78, Avenue de la Liberté, L-1930 Luxembourg, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).
Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc
9 Sep 2024
5 minute read
5 minute read
Key takeaways:
- We believe that the trust’s blend of small, medium and large companies has been a key contributor to performance.
- While smaller companies are often renowned for their experimental business models, those operating in less exciting industries can be overlooked.
- Smaller company valuations remain low, despite the UK economic picture notably improving.