Wealth management firms are among the largest stakes of a Merrill Lynch fund of UK small-cap stocks and are positioned to benefit as markets rise although interest rate hikes have raised risks, its manager said.
Rathbone Brothers plc and rival Brewin Dolphin are among the 10 largest holdings of the Merrill Lynch British Smaller Companies Investment Trust, run by Merrill Lynch Investment Managers since 2004. The trust was previously run by investment company 3i Group Plc.
"We are big holders of Rathbone with rising stock markets they will continue to do well," Mike Prentis, manager at the fund since September 2002, told Reuters.
Firms such as Rathbone and Brewin Dolphin, which manage money for well-heeled private investors, have seen their fortunes gain since stock markets recovered in 2003 and due to swelling ranks of wealthy individual clients.
Rises in interest rates in Britain and overseas have, however, been a risk to this recovery although much of the current phase of monetary tightening has already taken place so markets should gain further, Prentis said.
"I would hope we would see markets recover somewhat before the end of this year ... People expect that interest rates are peaking here and in the United States."
The investment trust has a total of 195 million pounds ($369.7 million) of assets, of which 15 million pounds is in the form of debt gearing and is benchmarked against the FTSE Small-cap ex-investment trust sector.
Besides a liking for wealth management firms, other themes emerging from the fund's individual stock picks is its focus on small engineering firms that have strong export links to rapidly growing economies such as China and to the booming energy production market, Prentis said.
He cited two stock holdings in the fund, Rotork Plc, a maker of value controls, and Spirax-Sarco Engineering Plc.
A third emergent theme in the fund's holdings has been a collection of companies that are geared to the strength of the London commercial property market, such as O Twelve Estates, which floated on the stock market earlier this year, and Shaftesbury Plc.
O Twelve, for example, has significant property holdings in the areas near the site chosen to stage the 2012 Olympic Games in eastern London, Prentis said.
The portfolio holds around 140 stocks and the fund normally will look to sell any holding that accounts for more than 2 percent of all assets.
"We buy sensibly priced growth companies We are not investing in early-stage or blue-sky companies. They have to have a track record that is sustainable."