Veteran small-cap investor Jenny Jones is bracing herself for further merger and acquisition activity as large-cap US companies seek to jumpstart growth through takeovers.
The Citywire AA-rated manager told Citywire Selector she is not positioning for takeover targets but is aware of the increased activity and the knock-on effect for the Schroder ISF US Smaller Companies fund.
‘The development in the market we are starting to see is growth plans coming to fruition in non-traditional ways, as more traditional growth paths are becoming more difficult. Companies have cut costs about as much as they can and now need efficient ways of growing, So the question now is, how do you do that?
‘M&A is becoming increasingly common in this space. This is to create synergies and open up new growth paths for companies. There is a big drive for M&A and I see that continuing.
‘We already had one stock bought out and, in honesty, there are likely to be more. Clarcor, a filtration company, was acquired by Parker Hannifin. Surgical Care Affiliates, an outpatient surgery centre acquired by United Health Services, is another example.'
Jones said markets had expected growth among small-caps off the back of pro-growth President Donald Trump coming to power, but the rally that followed his election has waned. Jones said a number of smaller companies are therefore more amenable to M&A.
‘The IPO market has been relatively dead and with relatively few entrants at the small-cap level. This is due in part to the higher regulatory burdens on public as opposed to private companies. There were a handful of examples in areas like energy but last year was not anything like years before.
‘In contrast, fewer companies want to go the private equity route, especially those with a founder still active in the business who is looking to cash out. The PE model is to take all of the costs out which is not always beneficial to the company. Being acquired by a larger concern is to many the more preferable route to cashing out.’
Jones, who has 23% of the fund in financial services and 15% in consumer discretionary stocks, said there were drawbacks in that some market leaders – or so-called ‘steady eddies’ – were removed from the fund by virtue of takeovers.
The Schroder ISF US Smaller Companies fund returned 26.3% in US dollar terms against a rise of 23.2% by its Citywire-assigned benchmark, the Russell 2000 TR, over the same three-year period to the end of March 2017.