Savers will have more generous tax-free allowances from April. Basic rate taxpayers will be able to receive £1,000 interest on savings, gilts and corporate bonds without paying any tax (for higher rate payers, it will be £500), and everyone will be able to receive £5,000 in dividends before paying tax.
New Isas (Nisas) have traditionally been the place where savers hold investments which they would be taxed on, whether dividend-paying equities or interest-paying bonds. But since most people will find the interest and dividends from their investments is below the new tax-free allowances, there is no need to shelter income-paying stocks and bonds in a Nisa.
Instead, the annual £15,000 Nisa allowance could be invested in stocks which will grow.
“Really, you should be looking at using your Nisa for capital growth,” says Richard Stone of The Share Centre. “If you are regularly using your Nisa allowance, don’t burn it all on income stocks. You can hold income stocks outside your Nisa, so keep capital growth stocks in your Nisa.”
With that advice in mind, we asked fund managers which small-cap stocks they are holding in their portfolios.
Read more: Four stocks you should buy in 2016
This is the company behind Patisserie Valerie, the Parisian-style cafe chain. It’s also branched out into boxed cakes in supermarkets, and the investment case rests on the simple fact that people are eating out more and baked goods remain popular. It has 138 stores under five different brands and is growing.
“It’s a very simple story of a retailer rolling out more stores to grow the business,” says Waine of Puma Investments.
Patisserie Holdings is on a P/E ratio of 29 times and has a market capitalisation of £345m.
A global business operating in 70 countries, Penna Group helps companies recruit staff and restructure their businesses. It’s the consultancy part of their work that is most important, says fund manager Gervais Williams of Miton, a well-respected small-cap investor. Penna designs strategies for laying off and redeploying staff when companies are going through mergers or periods of stress. It’s doing especially well in the UK market as it is heavily involved in the public sector, where a lot of restructuring is underway.
“A lot of local authorities are under pressure to cut costs and they are having to make major changes to their operations, assessing who fits in to the new structure,” he says. “Penna Group is doing really well because there is so much change.”
Penna is on a P/E ratio of 20 times. It has been quoted on Aim for nearly 10 years and has a market cap of £79m.
Another company benefiting from the resurgent housebuilding and construction market is Superglass, a manufacturer of glass fibre insulation. It reported a massive £9m loss last year but new management are repositioning the business to focus more on homes, and Williams highlights this stock as one with great growth potential. It’s one of the few specialists in its area and he thinks it can turn things around.
“The management are doing a great job. They have improved their range of customers and most importantly, they are taking the business from a loss to a profit,” he says.
It has a market capitalisation of £7m and is trading on a P/E ratio of -0.75.
ACCESSO TECHNOLOGY GROUP
This software company has become a global market leader in the amusement park sector. That includes theme parks, ski resorts, zoos, aquariums and cultural centres. Amusement operators love its technology which helps staff manage queues, make timed ticket sales and sell things on the move. Well-known small-cap fund manager Dan Nickols has invested in this company, and approves of a recent deal it has done to grow the business.
“The company sells worldwide, but recently announced a deal with Merlin Entertainments which should accelerate growth materially,” he says. “It’s not a cheap share in the near term, but the potential to be a materially larger company is significant.”
Accesso has a market cap of £207m and is trading on a trailing 12-month P/E of 111 times.
The UK housing market has picked up, boosted by government schemes which are helping get people onto the housing ladder. Increased activity in the housing sector tends to mean more business for companies involved in doing up homes, such as carpet companies, bathroom suppliers and builders’ merchants.
Safestyle is a nationwide provider of replacement windows and double glazing, and one of three major players in its niche. It has a solid business model and is highly profitable, says Justin Waine of Puma Investments.
“This is a company we like a lot. We think it is going to be a great business because it has stunning profit margins,” he says. “Safestyle grew straight through the last recession, right up from the bottom.”
It has a market capitalisation of £188m and is trading on a P/E ratio of 15 times.