UK small-caps have been an unloved asset class in an unloved market, with investors preferring to direct their money elsewhere.
Smaller companies have been enduring a hostile environment of higher interest rates and higher cost of capital, anaemic economic growth and a changing political landscape – and yet, over the past year, the average IA UK Smaller Companies fund has returned 7%. Since the market lows of September 2022, they have enjoyed an impressive rally, up 30%.
But not all funds have participated. In fact, three vehicles regarded as long-term outperformers and achieving top-quartile returns over the past decade failed to maintain their track record over the past 12 months and fell to the bottom of their sector.
This was the case for Liontrust UK Smaller Companies, managed by FE fundinfo Alpha Manager Anthony Cross, Alex Wedge, Matt Tonge, Natalie Bell and Victoria Stevens, who focus on steady businesses that are gradually growing and generating high levels of cash.
The £815.1m fund was the third-best in the sector over the past 10 years but fell to the second and then third quartile over five and three years, and ranked 41st out of 44 funds over 12 months.
Performance of fund against index and sector over 1yr
Source: FE Analytics
Square Mile analysts appreciate the “strong” long-term track record and the fund’s “many compelling attributes”, including the “very well considered and clearly defined” investment approach.
“Given the emphasis on smaller companies, steps have been taken to limit the fund's capacity, which is reflected in a fairly elevated annual management fee,” they said. “Whilst this may be inhibitive, it does protect existing investors from sizeable and short-term flows, as well as maintaining the integrity of the approach.”
The BlackRock Growth and Recovery and Thesis Stonehage Fleming AIM funds had similar fates and also slipped from long-term success to short-term flops.
The former is a £57.3m strategy managed by Matthew Betts, who has a preference for industrials and financials companies below £2bn of market capitalisation, while the latter, a £60m portfolio co-run by veteran manager Paul Mumford and Nick Burchett, invests in equities listed on the UK Alternative Investment Market (AIM) and has been shrinking in size since March 2022, when its assets under management touched £130m.
The Stonehage fund has featured on Trustnet before as one of the three most consistent UK small-cap funds of the decade and the those that won’t cost you the earth, thanks to the lowest ongoing charges figure (0.67%) in an otherwise expensive sector.
Mumford has taken on a senior adviser role at the firm at the beginning of the month, leaving Burchett as primary manager.
Source: Trustnet
While some funds were tanking, others were making a comeback. Two in particular that have been struggling over the past decade, seem to be turning a corner: Ninety One UK Smaller Companies and YFS Sterling Select Companies.
Managed by Matt Evans, the £142.3m Ninety One strategy invests primarily in the shares of UK smaller companies, which make up at least two-thirds of the portfolio, and in related derivatives.
With a return of 14.6% against the 7.1% of its average IA UK Smaller Companies peer, it ranked second-best in the whole sector over the past 12 months. Despite this result, assets under management (AUM) have dwindled significantly since March 2022, when the AUM stood close to £300m.
The fund’s top holding, representing 10% of the fund, is in the Vanguard FTSE 250 UCITS exchange-traded fund (ETF), a tracker of the FTSE 250 index, which the manager complements with holdings in names such as Jet2 (3.3%), AJ Bell (3.1%) and Trainline (2.7%).
Finally, the £25.3m YFS fund is managed by Melwin Mehta, Miles Nolan and Rik Tipton, who invest in a small portfolio of just 36 holdings in under-researched and mispriced companies.
They focus on differentiated business with high barriers to entry, and buy them at attractive entry valuation, to benefit from growth and re-rating over the following three to five years.
Its top holdings are specialist contract research organisation hVivo, infrastructure company Hill & Smith and cosmetics business Warpaint London.
This article is part of an ongoing series. Previous instalments include: IA UK All Companies and IA Asia Pacific Excluding Japan.