As equity markets show signs of recovery, UK smaller companies are starting to attract the attention of investors again. A global economic recovery should help boost profits and better sentiment towards equity markets is good news for smaller companies’ share prices. Fundweb asked advisers which are their favourite fund picks for a sector where the average fund has returned almost 50 per cent in the last three years.
Miton UK Smaller Companies fund
The Miton UK Smaller Companies fund is run by former Gartmore head of UK smaller companies Gervais Williams and launched in December 2012. City Asset Management head of research James Calder says that the fund is attractive because of the manager’s experience and its micro-cap focus. He says: “Williams has got about 20 years experience as a UK small cap manager. He is one of the grandfathers of small-cap and is one of the few people with experience investing in that part of the marketplace.”
Calder says that investing in the micro-cap space is a very specialist area and so it is important to have a manager with this expertise, as they will have the right experience and contacts. He adds: “The UK economy is improving and micro-caps will do well over the longer-term.”
Old Mutual UK Select Smaller Companies fund
The £460m Old Mutual UK Select Smaller Companies funds, run by Dan Nikols, has returned 52.7 per cent in the past three years to January 7 compared to a sector average for the IMA UK small companies sector of 49.2 per cent. Hargreaves Lansdown head of research Mark Dampier says the success of small companies funds centres around research and experience. He says: “As small caps are under-researched, it is good to buy an active manager, because they will be able to beat the index if they work hard. “
He says: “Old Mutual has a fantastic UK smaller companies team. They have been there for a long time. They work hard and spend their time seeing management. As they are experienced, they know the people in the businesses they tend to buy better and get the best deals.” Dampier says that the fund has not had great performance over the last couple of years, but managers have good and bad years.
Fidelity UK Smaller Companies fund
This fund has been managed by Alex Wright since February 2008. It is top performer in the IMA UK smaller companies sector over three years having returned 84.8 per cent. Bestinvest senior analyst Ben Seager-Scott likes this fund because assets under management are low enough at £113m to allow the manager to be nimble enough in a less liquid market. He says: “The manager has an interesting style of specifically targeting smaller companies that are out of favour, but where there are specific reasons for a turnaround in fortunes. The manager hopes to identify these stocks ahead of the market, and take advantage of the subsequent re-rating.”
Seager-Scott adds that by investing in stocks that are already out of favour, and where no value is being ascribed to future growth, these stocks generally have more limited downside potential.
Cazenove UK Smaller Companies fund
The £290m Cazenove UK Smaller Companies fund has been run by Paul Marriage for six years. During that time the fund has garnered a strong adviser following and is top quartile in its sector over one, three and five years.
Whitechurch managing director Gavin Haynes says: “Paul Marriage is a manager that has proven to be one of the best stock pickers of UK smaller companies in recent years. During his tenure he has managed to outperform his peer group and benchmark index significantly.” Haynes says that this is because Marriage is a true bottom-up, stock specific manager and he does not profess to make big calls on the economy or take big sector bets.
Haynes adds: “His knowledge of his portfolio and the UK smaller company universe is excellent. At £290m in size, the fund is still nimble enough to be able to actively manage positions, whilst peers with larger funds may struggle due to liquidity constraints in the small cap marketplace.”
Downing Active Management
This fund is managed by Judith Mackenzie since February 2011 and has a micro-cap focus. Vertem Asset Management branch principal and investment manager John Dance says: “Mackenzie takes a private equity approach to selecting investments, putting plenty of focus on intrinsic value and a company’s ability to unlock that value to investors.”
He adds that while the fund’s best performance has certainly come during Mackenzie’s tenure, it is perhaps more of a long term investment rather than a vehicle to play out a short term ‘small cap’ theme.