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Small and mid caps set to lead recovery, says BlackRock’s Plackett

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Richard Plackett, manager of BlackRock’s UK special situations fund, believes that small and mid cap stocks will lead the UK stock market as it recovers.

Richard Plackett, manager of BlackRock’s UK special situations fund, believes that small and mid cap stocks will lead the UK stock market as it recovers.

Smaller public companies have greater sensitivity to the global and UK economies. Profits in small and mid caps tend to recover faster due to their higher fixed cost bases and greater operational gearing. As turnover recovers profits pass faster through to the bottom line.

According to Plackett, with the bear market effectively over, small and mid caps should outperform the broader UK stock market, as they did in 2003 when they rose 43 per cent compared to the market which rose 21 per cent.

This is also true of the long term. GBP100 invested on 31 December 1955 (when the smaller companies index started) grew to GBP183,619 by 31 March 2009 compared to the same GBP100 invested in the UK stock market which would today be worth GBP32,697.
 
The BlackRock UK special situations fund, which is currently 65 per cent invested in small and mid cap stocks, outperformed its benchmark index in 2008 as a result of an emphasis on strong companies with solid balance sheets and by avoiding holdings in UK banks. The fund seeks out cash generative companies with strong management and defensible market positions, with solid balance sheets and a record of earnings growth or a compelling catalyst for positive change. The fund is biased towards companies with a high proportion of earnings from overseas.

Plackett says: ‘Unlike 12 months ago people now recognise we are in recession and this is fully reflected in stock market values. Markets are the cheapest they have ever been with price earnings ratios at historic lows and yields, compared to government bonds, at historic highs.

‘The global economy is showing signs of stabilisation and as the year progresses investors are focusing more on recovery prospects in 2010 and 2011. In anticipation of this we have been adding cyclical stocks to the fund and further increasing our small and mid cap exposure.

‘A flexible special situations fund has just the characteristics to exploit value opportunities at this stage of the investing cycle.’

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