BlackRock says small caps to lead recovery

Small and mid caps, which are geared to economic growth, will lead the UK stockmarket as it recovers, said Richard Plackett, manager of BlackRock UK Special Situations Fund.

With the bear market "effectively over", he said, small and mid caps should outperform the broader UK stockmarket, as they did in 2003 when they rose 43 percent, compared with the wider FTSE All-Share market, which rose 20.9 percent.

Plackett told a news conference he had reduced the proportion of large caps in the fund, to the mid-30s percent from mid-40s last year.

The Fund has at least 50 percent in small/midcaps at any time: the proportion is currently 65 percent.

He said small caps do disproportionately well during periods of recovery.

However, he stressed the importance of having the flexibility to have large caps in the 544 million pound fund, and that this had helped last year, when smallcaps (defined by the Hoare Govett Smaller Companies Index plus AIM, ex investment trusts) fell 47.7 percent, and the FTSE All Share fell 30 percent.

But he said: "Look what happened to smallcaps when they came out of the last recession in 2003."

There are good reasons why small caps outperform at such times, he said, pointing to their higher fixed cost bases and higher operational gearing.

He also pointed to the recovery of certain companies, now small caps, "which started off as large caps".

He mentioned companies such as Persimmon PSN.L , Punch Taverns PUB.L , Barratt Developments BDEV.L , until recently in the FTSE 100. But now their recovery is helping the small cap index, rather than the FTSE 100.

However, the biggest holdings are in large caps: BG Group

BG.L , at 6.2 percent, Royal Dutch Shell RDSA.L , at 5.3 percent, BHP Billiton BLT.L , 4.3 percent.

Plackett said he looked for certain key attributes in companies: strong management, strong balance sheets, and cash generation.

He holds stakes in Micro Focus MCRO.L , a software provider, and Rotork ROR.L , which makes valve actuators.

"All valve actuation is is switches that turn valves on and off. They have concentrated in one narrow area, and have become world leaders in their field.".

"We like companies who stick to what they are good at," he said.

He said he was optimistic that the stock market rally would continue, and the markets "were becoming more relaxed about the economic environment" due to the "unparalleled policy response".

The BlackRock Special Situations Fund, launched in 1981, lost 29.6 percent in the year to March, but was in the first quartile in its benchmark.

The fund is usually invested in 50 to 60 companies.

The UK small caps index .FTSC is up more than 40 percent from its March 9 low. The FTSE 100 .FTSE is up 27.8 percent.