UK smaller companies have been on a stellar run over the past couple of years or so as investors have become more comfortable taking on risk.
Performance of indices over 2yrs
Source: FE Analytics
Gutteridge, head of research at Brewin Dolphin, is bullish on the UK economy and as a result he fully expects smaller companies to continue to perform well.
He says investors should have no issue with buying into the small cap rally and recommends the five crown-rated, £78m R&M UK Smaller Companies fund, as its style means it will take full advantage of a UK recovery. “For our UK exposure we like the R&M UK Smaller Companies fund,” Gutteridge said. “The process has proven to be a very successful one; however, it is still very under-owned so the manager has a huge amount of flexibility within the asset class.”
“The manager also has a valuation bias within the fund so it has the ability to benefit from an ongoing recovery.”
The smaller companies sector is one in which investors are being forced to seek out new ideas in and lesser-known funds thanks to the soft-closure of numerous portfolios; Daniel Hanbury’s £78m fund could be one option.
R&M UK Smaller Companies was launched in November 2006, with Hanbury taking over the fund in July last year.
It is a top-quartile performer in the IMA UK Smaller Companies sector since launch with returns of 136.46 per cent, beating its benchmark – the NUMIS Smaller Companies ex IT index – by close to 40 percentage points.
Performance of fund vs sector and index since Nov 2006
Source: FE Analytics
However, as the graph shows, the majority of that outperformance has come more recently.
Our data shows that it delivered the third highest returns in the sector – 36.98 per cent – in 2012 and in 2013 its returns of close to 60 per cent made it the best performing fund in the sector and the fourth best in the whole IMA universe.
While some investors will be pleased to see that the fund has performed well, others will be concerned that it could begin to fall back given its already stellar returns.
Gutteridge sits in the former camp, saying the manager’s investment approach, tied in with the fund's relatively small amount of assets under management, means it can continue to outperform.
“We are very proud of how it has performed, but we are aware of the valuation issue.”
“However, there is a value bias within the portfolio and we believe there will be a further resilient economic recovery which is an environment where the fund will perform well in,” Gutteridge added.
Gutteridge understands why some investors would be nervous backing the R&M UK Smaller Companies fund after such a good run – or even smaller companies in general.
However, he says investors can afford to be bullish because an improving economic outlook will mean the asset class will continue to outperform.
“You can become nervous if an asset class has already performed well. However, I think you can expect small cap funds to perform well, if our core thesis [of economic recovery] comes to fruition, so we have no issue backing it,” Gutteridge said.
It is not unheard of for smaller companies funds to consistently outperform their peers.
For example, FE Alpha Manager Paul Marriage’s five crown-rated Cazenove UK Smaller Companies fund was one of the sector’s top-eight performers in 2013, 2012 and 2011. However, it surpassed £1bn last year and has since closed to new money.
The managers of the R&M UK Smaller Companies fund have a strong track record of outperforming their benchmark.
FE Analytics shows that it has generated the seventh-highest alpha score in the sector relative to its index, the third highest information ratio and the fifth highest Sharpe ratio over the last three years.
The portfolio is made up of 74 holdings, with its top-10 positions accounting for close to 30 per cent of the total assets. The manager does, however, have a hefty 10 per cent cash weighting.
Although Hanbury holds 33.5 per cent of his fund in the FTSE 250, he is considerably underweight the index compared with his benchmark. The manager is also marginally underweight the FTSE Small Cap index.
Instead, Hanbury favours the FTSE AIM. He is 34.5 per cent overweight the index with Plus500, Blinkx and Utilitywise making up his three largest active bets.
Performance of stocks over 3 months
Source: FE Analytics
All three stocks have had a stellar run of late, as the graph shows.
The R&M UK Smaller Companies fund has an ongoing charges figure (OCF) of 1.74 per cent and requires a minimum investment of £1,000.
