The FTSE 250 has blown the FTSE 100 and the FTSE Small Cap indices out of the water over the period, and the likes of Harry Nimmo (pictured below), Giles Hargreave and Paul Marriage have benefited from having a large chunk of their portfolio invested in this area.
Performance of indices over 10yrs
Source: FE Analytics
There is an element of controversy, however, with some experts questioning the motives of managers who have increased their exposure to mid caps. FE Alpha Manager Hargreave recently indicated that part of the reason for moving his Marlborough Special Situations fund into mid caps was due to liquidity.
It has seen significant inflows in the last 12 months or so, sending assets under management (AUM) to £614m. The same charge has been levelled at Nimmo’s Standard Life UK Smaller Companies fund, which includes some FTSE 100 companies in its top-10 holdings. He has more than 60 per cent in the FTSE 250, with the result that some experts suggest it should no longer be referred to as a small cap portfolio.
That said, the manager is keen to point out that the fund still adheres to the IMA definition, which insists that all UK Smaller Companies funds must have 80 per cent of their assets in the bottom 10 per cent of the market by capitalisation.
Many UK small cap managers use the Numis Smaller Companies index as their benchmark rather than the FTSE Small Cap, which includes a number of FTSE 250 stocks within it.
Rob Gleeson (pictured), head of FE Research, thinks the move into mid caps is a problem for investors who already have a significant portion of their assets in that market already.
"I don’t think there’s a problem with small cap managers who are moving into mid caps if this is where they’re finding the opportunities," he said. "The small and mid cap markets behave very similarly to one another. They’re both a high-beta play on the UK equity market, and so from that respect it’s not a major problem; the skills required to identify a good small cap stock and a good mid cap stock are reasonably transferable."
"There is a problem, however, if you want a designated weighting to small caps because you’re already invested in a mid cap fund."
He says the decision to invest in Giles Hargreave’s Marlborough Special Situations fund or Marlborough UK Micro Cap Growth fund encapsulates these two opposing arguments.
"If you’re looking for the higher growth potential of smaller companies and are already invested in the Special Sits fund, it shouldn’t be a problem that the manager is moving into mid caps. However, for those who are worried, you’ve got the UK Micro Cap fund, which concentrates on the lower end of the small cap market."
For anyone who is worried about this move into mid caps, here are two genuine small cap focused portfolios that do not rely on the FTSE 250 to deliver strong returns.
Unicorn UK Smaller Companies
Rowan Dartington’s Tim Cockerill points to John McClure’s £10m portfolio as one of the few top-rated options that concentrates solely on small and micro cap stocks.
McClure, an FE Alpha Manager, has led the four crown-rated fund to returns of 122.59 per cent over a five-year period, beating both its sector average and Numis Smaller Companies ex IT benchmark. This puts it in the top-quartile of the IMA UK Smaller Companies sector.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has also been consistently less volatile than its peers and the index, and has a lower max drawdown.
It was launched in 2002 and had a tough start to life, particularly in 2004 and 2007; however, since then it has recovered strongly.
Top-10 positions include Liontrust Asset Management and British Polythene, which both sit in the FTSE Small Cap index, and recruitment consultancy Harvey Nash Group, which sits in the FTSE Fledgling index.
The fund is available for a minimum investment of £1,000 and has ongoing charges of 1.54 per cent.
Marlborough UK Micro Cap Growth
The £174m Marlborough UK Micro Cap Growth fund has nothing in mid caps, compared with 22 per cent from Hargreave’s Special Sits portfolio.
The vast majority of the fund is invested in companies with a market cap of less than £250m, with the likes of Idox, Optimal Payments and CML Microsytems currently featuring prominently.
The fund is a top-quartile performer in its IMA UK Smaller Companies sector over three and five years, but has had a tougher time over one year.
Performance of funds and index over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Marlborough - UK Micro Cap Growth | 25.52 | 82.78 | 133.9 | N/A |
| Marlborough - Special Situations | 32.42 | 80.62 | 112.95 | 386.54 |
| IMA UK Smaller Companies | 33.21 | 64.32 | 82.11 | 201.25 |
Source: FE Analytics
The fund has managed to consistently beat the Special Sits fund, albeit with more volatility; however, it is still a lot less volatile than its IMA UK Smaller Companies sector average and benchmark, even though it focuses on micro caps, an area that is typically considered to be riskier.
Hargreave runs a highly diversified portfolio of well over 200 stocks, which has helped to dampen downside risk, not to mention that defaults have been few and far between since the fund was launched in 2004.
The FE Research teams rates the fund highly, and includes it in the FE Select 100.
"UK Micro Cap Growth is one of the best UK funds in terms of performance and quality of investment team," the team said.
"In micro cap investing, stockpicking is the main driver of performance, which puts the emphasis on in-depth knowledge of companies and this works in the fund’s favour."
"The fact that Hargreave invests in a large number of stocks limits the risk of any single company’s share price falling and helps to stabilise the fund."
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.54 per cent.
In a previous article on FE Trustnet, we looked at why investors should be wary of the best-performing funds.