The Fund Manager: Think Europe, small and 'bottom up'

Simon Chisholm developed an interest in fund management while he was still a student. "I did my dissertation in the psychology of investment management," he says. "On my days off, when I didn't have any lectures, I used to work free for companies in the City and got to know how the business worked. Being a fund manager is a fantastic job as it lets you satisfy your curiosity.

Simon Chisholm developed an interest in fund management while he was still a student. "I did my dissertation in the psychology of investment management," he says. "On my days off, when I didn't have any lectures, I used to work free for companies in the City and got to know how the business worked. Being a fund manager is a fantastic job as it lets you satisfy your curiosity.

"After graduating. I joined Coopers & Lybrand where most of my clients were fund managers. Then I got a fund management job with Singer & Friedlander."

Mr Chisholm joined the European team at Henderson Global Investors, among the largest investors in the small-cap arena. "I thought there would be opportunities in the European markets. I prefer to focus on smaller companies because a company-specific, 'bottom-up' approach is much more interesting than just looking from a 'top-down, macroeconomic' perspective."

He is managing Henderson European Smaller Companies. "The European smaller-company markets are inefficient and markets they operate in are also inefficient. I want to profit from those inefficiencies.

"There are more than 4,000 smaller companies in Europe and I reckon of the 200 analysts who are looking at European companies, only 15 are looking at those 4,000 small-cap stocks.

"This is where my dull accountancy background is useful, because I am a working-capital nut. I look at the profit-and-loss account then I look at the working capital because cash can't lie. The most important question I have to ask is: 'How much do I have to pay for it?' I use a range of valuation measures, but I look at what are going to be the catalysts that will drive the share price."

Although the longer-term performance of the fund has continued to be strong, the past 12 months have seen some tough times for European small caps. "The lack of earnings visibility made corporate valuations increasingly complex, markets assumed the worst and growth stocks were negatively re-rated. And the perception that in economic downturns small caps suffer means marginal buyers of small-cap equities have gone.

"But consumer confidence remains high and we are now moving into cyclical areas of the market, although certain companies with a significant exposure to the US will continue to be avoided."

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