Fidelity UK Smaller Companies and Janus Henderson UK Smaller Companies are the most consistent IA UK Smaller Companies funds of the past decade, beating the Numis Smaller Companies ex ITs index – the most common benchmark in the sector – in nine of the past 10 calendar years.
Of the 44 funds in the sector with a track record long enough to be included in the study, another nine managed to beat the index in eight of the past 10 calendar years.
Performance of funds vs sector and index
Source: FE Analytics
Janus Henderson UK Smaller Companies has been headed up Neil Hermon since December 2012. The manager takes a growth-at-a-reasonable-price approach, focusing on what he calls the ‘four M’s’ when analysing a company: business model, management team, momentum and money (fundamentals).
He has built a well-diversified fund with more than 100 positions, each of which is typically held for four to five years.
While any new investment must have a market cap of less than £1.7bn, Hermon likes to run his winners and the only size constraint at the upper end is when a holding enters the FTSE 100, at which point he will sell out.
Hermon is bullish about the prospects for the UK, pointing out it looked cheap on a variety of metrics even before the recent sell-off. And, he said that if investors don’t notice this, other companies will.
“If you pick up on the example of 2019, what we've seen is a significant amount of M&A activity from private equity and also from international companies,” he explained.
“For example, RPC was bought by Berry of the US, Dairy Crest was bought by a Japanese business, Inmarsat was a consortium acquisition, Greene King from Hong Kong money, BCA and Merlin both private equity, Cobham from Advent, EI from UK private equity and Sophos again from American companies.
“The UK’s cheapness has been picked up by international investors and buyers and also private equity. And we think that continues. With sterling remaining depressed, we can expect to see further M&A in the UK market in the coming year, particularly as the environment around politics has been somewhat improved.”
Data from FE Analytics shows Janus Henderson UK Smaller Companies made 361.84 per cent over the 10-year period in question, compared with gains of 245.8 per cent from the sector and 217.22 per cent from the benchmark.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £239m fund has ongoing charges figure (OCF) of 0.84 per cent.
Fidelity UK Smaller Companies made its name under former manager Alex Wright, who took it to second place in the entire Investment Association universe in his first five years. He was joined by Jonathan Winton shortly after reaching this milestone in early 2013, at which point he began to step back from the fund to concentrate more on running Fidelity Special Situations and Fidelity Special Values. He eventually left the smaller fund completely in March last year.
Fidelity UK Smaller Companies became a victim of its own success when a flood of money caused it to be soft-closed, twice: in 2013 and 2016. However, it has now been open since April last year.
Square Mile Investment Consulting & Research pointed out this is Winton’s first position as a sole, lead fund manager and warned he has yet to be fully tested across a full market cycle.
However, the group takes comfort from his focus on downside risk and the protection of capital during times of market distress, in what has historically been a volatile asset class.
“This approach has proved to be very successful since the fund's launch and given Winton's commitment to a contrarian investment philosophy, we do not see a meaningful departure to the approach he adopted working alongside Wright,” it added.
“There will be periods when this style of investing is out of favour, but we think it should provide investors with impressive returns over the long term.”
Fidelity UK Smaller Companies made 380.18 per cent over the 10-year period.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is £375m in size and has an OCF of 0.92 per cent.
Of the funds that beat the index in eight of the past 10 calendar years, Liontrust UK Smaller Companies, Merian UK Smaller Companies and Schroder Institutional UK Smaller Companies also beat the sector in the highest number of calendar years, also eight.
The Liontrust fund did the best of these three over the 10-year period, with gains of 418.88 per cent.
However, the FE Investments team said that while managers Anthony Cross and Julian Fosh have “proven the robustness of their process”, the £1bn-plus size of Liontrust UK Smaller Companies represents something of a liquidity risk.