UK smaller company shares ‘plainly mispriced'

Gervais Williams, Head of UK Smaller Companies at Gartmore, believes that his asset class now offers some compelling investment opportunities that stand to do well, even if the economy and the broad stock market continue to disappoint.

He is particularly positive about the UK's "micro-caps" - the companies found outside the FTSE All Share Index, quoted on the FTSE Fledgling Index or AIM.

Gervais emphasises that he is cautious about the prospects for the UK economy and the broad stock market, but reports finding a wide range of attractive investment opportunities.

"Economic uncertainty means that the market has been largely ignoring the potential of investments at this end of the market," says Gervais. "We're finding companies that are not only undervalued but plainly mispriced. Some of these stocks could rise by a multiple of our invested capital over time".

Gervais points to a substantial increase in corporate activity over recent months as vindication of the view that the sector now offers extraordinary value. Recent examples of smaller companies represented in Gartmore's funds that have been or are in the process of being acquired include: Civica, Enodis, MediaSurface, and Titan Europe. One of the latest candidates to benefit has been the aero-parts distributor, Aero Inventory, which announced last month it had received a "highly preliminary proposal from a third party".

Gervais and his team report finding a good number of attractive companies in sectors such as industrials and technology. These sectors are certainly well represented in the £183m Gartmore UK & Irish Smaller Companies Fund: BATM Advanced Communications (telecoms routers and switches); Pace (set-top boxes); Brammer (industrial bearings and other ancillaries); and Aero Inventory being the Fund's largest holdings currently. Over the past three months, the Fund is down 0.1% compared with a 7.0% fall on the FTSE Smaller Companies (excluding Investment Companies) Index.