HL advises switch out of Gartmore UK & Irish Smaller Companies

Hargreaves Lansdown has suggested that investors should switch out of Gervais Williams’ Gartmore UK & Irish Smaller Companies fund.

Meera Patel, a senior analyst at Hargreaves Lansdown, says the firm has been watching the £145m vehicle for some time. While it has generally performed in-line with peers, she says its returns have recently deteriorated.

“We believe one reason for this is that the managers [Williams and Rob Giles] typically sell their shares in companies that expand beyond a certain size to ensure all the stocks within the portfolio fit with the ‘smaller companies’ mandate.

“We feel stock selection is unlikely to improve, and this could continue to act as a drag on performance”

“However, some of the medium-sized companies that have been sold in recent years have continued growing strongly, and this has constrained performance. This approach contrasts with others in the sector who, while still focusing on smaller companies, will continue to hold shares in rapidly expanding medium-sized businesses to benefit from their full growth potential.”

Meanwxhile, Patel says Hargreaves Lansdown has examined the effect of the managers’ stock selection on the fund’s performance, and says its analysis suggests it has deteriorated recently. (article continues below)

“We feel stock selection is unlikely to improve, and this could continue to act as a drag on performance,” says Patel. “We therefore believe investors should consider switching to a superior alternative with a more flexible approach, such as the Standard Life Investments (SLI) UK Smaller Companies fund.”

Managed by Harry Nimmo, Patel says over the past five years the £555m SLI UK Smaller Companies fund has returned 80.2%, which she says makes it the best performing fund in the IMA UK Smaller Companies sector.

Over the same time period the peer group average return is 18%, while Gartmore UK & Irish Smaller Companies has fallen 1.3%.