Small can be not only beautiful, but also profitable

HENDERSON Global Investors' European Smaller Companies fund - valued at more than £133 million - has caught the attention of investors after its short- and medium-term performance put it at the top of its sector.

The fund, which invests in European smaller companies excluding the UK, has returned 178.4 per cent over three years and 51.6 per cent over the past 12 months, according to Trustnet. The benchmark European Smaller Companies sector average returned 131.8 and 20 per cent, respectively.

Simon Savill, manager of the fund since January 1999, said the performance reflected the state of the sector over that time. "Smaller companies have generally been very strong for the last few years in terms of absolute performance and in terms of outperforming larger companies," he said.

He added that last month was "the first time in a while" that larger companies outperformed smaller companies.

The largest positive contributor to performance in the fund was Boehler Uddeholm, an Austrian speciality steel company, which has been the subject of a takeover bid.

Other positive contributors included German specialist construction firm Bauer and Andritz, an Austrian process engineering company.

Savill said a number of small companies had not been fairly valued by the market, which partly accounted for the performance, while there was also a bounce back after a number of years of underperformance.

Savill seeks good businesses at reasonable prices and is prepared to stick with them.

"We work on a stock-picking basis rather than sector or geographical weightings," he explained. "We look for a strong business with a strong competitive position, where we have confidence it will make progress in the next two to four years.

"But you must pair that with what you are paying for that. It's about a mix of attractive valuation and a good business."

Over the past year, the fund showed a good mix of firms from different industries together with new and old companies. Savill said: "Some of the best contributors were ones we have held for four or five years, while others we have held for two or three years, not necessarily having done very much for a couple of years.

"And some of the best performers were ones we have only held for six or nine months."

Savill looks for companies that have dynamic niches in a headline, dull industry, where the businesses are often lowly valued: "What never ceases to amaze me is, when looking at smaller companies, just how many niches there are."

The Henderson Global Investors European Smaller Companies fund is an open-ended investment company. It is ISA, PEP and savings-plan compatible. For further information call 0800 832832 or visit www.henderson.com