Bill Jamieson: Mini marvels are the place to put your cash

FALLING inflation, reductions in unemployment at the UK level, rising household incomes, a pick-up in retail sales, even an improvement in the public finances – if the economy has now crawled out of recession, as gross domestic product (GDP) figures are expected to show this week, should investors now buy into recovery?

It certainly looks as if many already have, with the FTSE 100 index climbing a further 1.8 per cent last week to 5,896.22, having crossed 5,900 earlier in the week.

And, in the column today, we single out four outstanding smaller company investment trusts for special mention.

Just to see any recovery at all given the depth of despair to which much recent commentary has sunk is a major advance.

But the problem is that even though there has been a modest improvement on some measures, it is, we are told, nowhere near enough to get us out of the mess we’re in – never mind lift us into a cyclical recovery of old.

However, many smaller companies funds have been putting in a rip-roaring performance. It is as if a recovery has been well under way for a year and that more positive-minded investors will now be showing big gains.

But other fund managers are adamant that we are by no means out of the storm and that investors should not be lulled into a false sense of security by the recent flurry of seeming good news.

Rob Burdett, co-head of multi-manager investment at Thames River, cautions that investors should take care. He sees no ­reason to change his asset allocation on recent more positive news. Burdett told the TrustNet financial analysis website last week: “The economy is just bumbling along, even though the unemployment figure is quite good”.

Eric Moore, co-manager on the PSigma Income fund, is also wary about recent data.

“We don’t think it matters very much whether UK GDP ticks up or down a half a percentage point, we cannot see it accelerating to 2 per cent or 3 per cent.

“In the UK it’s hard to see where growth comes from. GDP figures may be revised upwards and show a positive number in a couple of months, which will be a nice headline for the News at Ten, but won’t really make a difference.

“One number doesn’t make a trend, and it’s still a small number comparatively, just wobbling around zero. We are still cautious about the long-term outlook.”

This sharply contrasts with the optimistic Clive Beagles, co-manager on the JOHCM UK Equity Income fund. He told the website he believed the UK was out of recession and that it offered good opportunities for capital growth.

Beagles pointed to new car sales growth of 9 per cent last month as a sign of a thriving economy, and said that he saw economic conditions very supportive of the country in the coming months.

However, while Burdett said he wasn’t positive on the UK economy as a whole, he did think there was value in certain sectors: “We think small cap in the UK at the moment is the way to go. There is a large opportunity and in terms of share price performance it did not do too badly in the second quarter.”

Investors in some of the investment trusts specialising in smaller companies may well be wondering whether all this caution may have been overdone.

They are already sitting on very handsome gains and with every prospect of more to come in the period ahead.

For example, the Standard Life UK Smaller Companies Investment Trust has gained 22 per cent over the past 12 months and a staggering 107.4 per cent over the past three years. “Recession? What recession?” investors may well be entitled to ask.

Dunedin Smaller Companies Investment Trust, part of the Aberdeen Asset Management stable, has seen its shares rise by almost a third in the past year and they are up 86 per cent over three years.

Even better over the past year has been Aberforth Smaller Companies Investment Trust, which has risen 35.8 per cent over the year to last weekend.

The shares, at 677p, are standing on a discount of 13.3 per cent to net assets and are yielding a tasty 3.15 per cent.

And top of the class in terms of 12-month performance is Henderson Smaller Companies Investment Trust.

The trust’s shares have risen 36 per cent over 12 months and 76 per cent over the past three years – and are on a discount of 19 per cent.

So there would seem plenty to go for yet with trusts that have proven themselves to be good growth business spotters.

The moral seems to be: take great care not to be drawn into a “buy everything” spree, but opt for those funds and trusts with a track record in picking small company winners.