Page 14 - DIY Investor Magazine - Issue 25

UK SMALL-CAPS: THEMES FROM A CRISIS
Harry Nimmo,
Manager of Standard Life UK Smaller Companies Trust plc
Engaging with companies is core to our equity investment process. Of course, the last few months have prevented us from physically meeting with the management teams of the UK small-cap firms in our sector. However, thanks to technology and the removal of time-consuming travel, we have had more, not less, contact with key decision-makers.
Given this, we thought it would be interesting to share some of the themes that have emerged through these conversations. After all, it is these insights that will inform our activities in the challenging months ahead.
THE STRONG HAVE GROWN STRONGER, THE WEAK HAVE GROWN WEAKER
The crisis has exaggerated the disparity between good and bad businesses. Too many poor businesses have survived for years thanks to buoyant economic conditions, with many living off cheap debt. It’s taken a crisis like this to push those businesses beyond the point of no return.
By contrast, companies that were in strong positions prior to the pandemic (on market share, growth, strong balance sheets) have thrived relative to their peers. Many have benefited from the demise of weaker rivals. We think this trend will continue.
COVID-19 HAS ACCELERATED CHANGE
Change has also come fast. One company stated that it has achieved “eight months’ work in three weeks”; another said it brought its restructuring plans forward by “three years”. Change has come in many forms.
For example, we have seen a shift in demand accelerate online activity and sales. Investment in operations and technology has given businesses an additional edge over rivals. We have also seen structural shifts, resulting in cost-savings and productivity gains as employees work from home.
The take-home message? Those quickest to adapt to the new landscape have and should continue to prosper.
DIGITAL TRANSFORMATION A FOCUS
Digital businesses have thrived in the current environment. Companies across sectors highlight increased ‘digitalising’ – both external and internal – as a driving factor.
Take Kainos, the Belfast-based software firm. It provides digital technology solutions that allow organisations and people to work “smarter, faster and better”. The company works closely with the UK government on numerous projects, including rapidly building the digital infrastructure for the recent furlough programme.
ESG KEY TO SUCCESSFUL COMPANIES
Firms with robust ESG (environmental, social and governance) credentials have operated strongly during the crisis. A major differentiating factor has been how they have treated and supported their staff during lock down.
Those with comprehensive employee programmes and robust internal cultures have come to the fore. Engagement has been of paramount importance. Many have ensured that training and development opportunities have been readily available. Measures to promote social interaction and communication have helped avert a mental health crisis.
Companies such as Cranswick, the UK food producer and supplier, have set up trusts for those employees that have suffered bereavement during the pandemic.
DIY Investor Magazine | Sept 2020 14