Having spent the past 10 months considering new funds for the Waiting Room which invest in asset classes ranging from sterling strategic bonds to Japanese equities, it’s now time to tackle those which wholly invest in smaller companies.
As investors see rising correlation amongst larger developed equity markets, many are turning to smaller companies to seek diversification and the potential for added returns. Smaller companies are perceived to be more tied to the fortunes of local, rather than global, economies. With divergence in monetary and fiscal policy expected to increase, demand for these smaller companies funds could be on the up, but thereby cause capacity issues. There are fewer smaller companies funds in the Investment Association universe compared to those investing in mid to large cap stocks. As such, I have combined four IA sectors and squeezed UK, US, Europe & Japan smaller company funds into this month’s Waiting Room. This creates, from my data, a universe of 86 funds, which I’ve whittled down to a US, a European, and a UK fund – none of the Japanese smaller companies funds fit the bill.
Artemis US Smaller Companies fund
Starting with the US, Donald Trump’s election into the White House has provided fuel to light the flames of a stronger domestic economy. With a broad policy of “cut and spend”, President Trump has promised a reduction in both corporate and personal taxes as well as infrastructure spend to build roads, repair bridges and revamp ageing airport terminals. All this has been seen as a positive for smaller companies, which are best positioned to benefit from such policies. Whether these policies are affordable will be determined by how much Trump can persuade Congress to fork out given the nation’s rising debt. While political risk is a permanent feature of investing, typically the effects are short lived and investors soon return to focusing on long term fundamentals. This is the focus and approach of Cormac Weldon and his team who manage the Artemis US Smaller Companies fund.
The fund typically has around 60 holdings, regarded as a concentrated portfolio for smaller companies, and looks for ideas from companies with a market capitalisation up to US$10bn. The team can boast resource both in breadth and depth, with seven analysts to support their proprietary research process, which starts with a macro view of the current economic environment to find themes worthy of further investigation. The fund is approaching its third anniversary but the team has a longer track record, having previously worked at Columbia Threadneedle.
F&C European Small Cap Ex UK fund
To Europe next, where you may be surprised to learn that the average European Smaller Companies fund has outperformed the average fund in the mainstream sector over the last three years. This despite a Eurozone project which is still struggling for both monetary and political cohesion and where two major European prime ministers have been forced to resign following national referendums where they failed to gain the populist vote.
With further elections taking place in the region this year, political uncertainty will be a key factor on the minds of all fund managers. I have chosen the F&C European Small Cap Ex UK fund, which was launched a couple years ago to join the group’s stable of existing European Small Cap funds, comprising an investment trust and a pan European offshore fund.
Sam Cosh is the lead fund manager and despite a fairly short tenure is building a reputation amongst professional fund buyers for a specialism in this sector. There is a large universe to trawl through, so Sam and his colleagues search for value with quality with good management in their company fundamental research, Results since launch in mid-March 2015 have disappointed against their stated benchmark, which may a reflect an investment style out of fashion. The fund has its followers, though, with current assets under management at around £70m.
River & Mercantile UK Micro Cap Investment Company
Finally, it’s back to the Waiting Room to call for my last fund; one that focuses on investing in UK micro cap stocks. Micro caps are essentially the smaller companies of the smaller companies sector, typically defined as companies with a market capitalisation between £50m to £150m.
This provides exposure to the growth of the UK economy and at the same time to the most talented entrepreneurs in the country. Generally speaking the larger smaller company funds avoid over investing in this universe for liquidity reasons.
With these illiquidity concerns the emphasis is firmly placed upon the stockpicking skills and patience of the fund managers; a quick exit is not always an option available. Indeed this maybe a good argument for a closed end vehicle to be invested here. For this reason and the obvious conflict in writing about the recently launched Liontrust UK Micro Cap Fund, I have chosen to highlight River & Mercantile UK Micro Cap Investment Company.
This is managed by Philip Rodrigs, who focuses on stockpicking using the proprietary PVT philosophy to find attractive opportunities. This was launched late 2014, joining a small band of funds focusing wholly on this under researched area of the UK market.
John Husselbee is head of multi asset at Liontrust