Barings small cap fund eyes more cyclical exposure

By James Molony

LONDON (Reuters) - IT, retail, and telecoms stocks are among the most attractive in the small cap market following one of the worst bear markets the asset class has seen, Baring Europe Select Trust manager Nick Williams said.

The trust, which focuses on European smaller companies, has started moving back into more cyclical areas of the market in the wake of the sell off and is looking to add to positions in IT, and is eyeing the retail and healthcare sectors.

Williams' fund has returned 15.14 percent over the last six months, data from Thomson Reuters fund research firm Lipper showed. Over the last 12 months, the return is still at a negative 25.77 percent, which represents a significant outperformance in his peer group.

The Lipper Global Equity Europe Small and Midcap benchmark ranks the fund as 20th out of about 200 rivals over 12 months.

The MSCI European Small Cap index fell 53.4 percent in 2008, and was down 62 percent from a high reached during 2007, the worst performance for the asset class in at least 20 years.

At end-March, European small cap shares traded at about eight-times earnings, based on expectations of zero to slightly negative profit growth in 2009, Williams said.

"That gives you a lot of valuation support in that the longer-term averages are much higher and that eight-times earnings already includes significant falls in profitability from company highs," he said.

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Recent buys in the portfolio include low cost airline Ryanair (RYA.I), which has rallied strongly in recent months as a result of the falling oil price, Williams said.

The company also stands to emerge from the recession with an even stronger market position gaining ground as competitors struggle or even go bust.

Others include Norwegian video conferencing provider Tandberg (TAA.OL), which apart from being cash rich has gained market share in recent months with the launch of new products and has benefited from growth of 16 percent in the underlying market.

"The IT sector has had a strong bounce in many parts but I think there's probably still further upside in computer hardware and IT service sector stocks," Williams said.

"Some of the healthcare stocks which have been left behind completely in the recent rally now look quite attractive."

Williams said he is also eyeing a number of opportunities among clothes retailers which can survive the recession and are attractively valued

"They won't be generating incremental profits over the previous year but they'll have a perfectly reasonable profitability," Williams said.