Top-performing smaller companies fund could grow by £300m

Resolution Asset Management fund manager David Clark says his top-performing £110m smaller companies fund could grow by another £300m before liquidity constraints affected returns.

Clark, whose fund has returned 110.75 per cent in the three years to the end of October, ranking it third in its sector, says the fund could grow to £450m or more before liquidity issues began to hinder his ability to invest.

He believes the fund will continue to perform at least as well as it has since he assumed the helm in November 2004, saying that undervalued stocks will always exist to give stock picking managers opportunities to outperform.

Recent volatility has had little impact on Clark’s investment process – he says it has only affected the amount he is willing to pay - but he believes valuations are looking much healthier than they did several months ago. The volatility has enabled Clark to buy a number of stocks that he previously considered to be excessively valued and he says that, at a P/E ratio of 12.2x next year’s earnings, “the market is not overpriced at all.”

He says: “You have to kiss a lot of frogs to find a prince in small caps but the fund’s performance has been extremely consistent in the last three years and I don’t see any reason why that shouldn’t continue. The fund has plenty of room left and it is a long way from getting to a size where liquidity becomes a problem. I’d be comfortable with it reaching £450m or so as our process is entirely scalable.”