European News

08, Mar 2010.

Octopus Investment's UK smaller companies fund likes sectors such as healthcare and technology which benefit from overseas earnings exposure amid uncertainty ahead of Britain's upcoming election.

"You can see by the way markets are behaving at the moment, with UK Plc, there is not that much momentum behind it really," said Richard Power, who runs the 18 million pound fund.

"There's a lot of uncertainty around the election. Will there be a hung parliament? Will there be a double dip? Or are we going to continue this rather slow, painful pull out of recession?"

Power said while the essentially "bottom up" fund has not targeted international exposure per se, companies that do have this bias tend to be making "more positive noises".

"We are seeing consistent contract wins in software companies. So, it felt like bigger buyers were back again having put the IT budget on hold for a year or so during the recession," he said.

Bond International Software (BDI.L), which specialises in software for the recruitment sector, ranks among the top 10 companies held by the fund.

"We have seen some good contract wins from Bond. They have got a world leading product. They have got good sales over in the U.S. (and) the likes of Michael Page (MPI.L) have been taking on their software globally," said Power.

Network monitoring company Endace (EDA.L), whose incomes are nearly all derived from the United States, is also in the top 10.

While exposure to the United States, which historically has always led Britain out of downturns and has "picked (itself) up rather faster than the UK as far as the general economy goes", is a benefit, Power's biggest draw is companies with leading products.

Diagnostic kits maker Immunodiagnostic Systems (IDH.L), a leading vitamin D products provider, is the fund's top holding.

The fund also holds Advanced Computer Software (ASWA.L) and System C Healthcare (SYS.L), providers of software to the healthcare market.

In the 12 months to the end of February, the fund returned 51.3 percent, underperforming the AIM market .FTAI by 34.5 percentage points and lagging other funds investing in smaller British companies by 8 points.

CUTBACKS WILL WEIGH?

Power sold Connaught (CNT.L) and Mears (MERG.L), which provide ongoing maintenance in affordable housing, with investors concerned about the possibility of a hung parliament.

"They should stand up but the sentiment is not going to be favourable towards them because of uncertainty around public spending," he said.

The fund does, however, still hold stocks in areas which could be affected by government spending cutbacks.

Healthcare Locums (HLO.L), for example, which provides temporary doctors to the National Health Service, could be perceived as being vulnerable.

"(But) one way of dealing with (budget cuts) is to hire more temporary rather than full-time staff. They don't have the costs of a full-time employee or the pension costs," Power said.