Six of the 50 best performing trusts over the last decade reside in the IT UK Smaller Companies sector, according to the latest data from the Association of Investment Companies (AIC).
When considering the total net asset value returns (NAV) of the top 50 trusts over 10 years, 20 per cent (10 trusts) came from smaller companies sectors. Of this, more than half were UK trusts.
It is widely accepted that smaller companies should be able to outperform large cap-focused strategies over the long-term as there is more room for these stocks to grow.
This study of 266 eligible trusts shows that the UK smaller companies strategies have generally outperformed other small-cap sectors and specialist trusts. Indeed, of the 19 members in the IT UK Smaller Companies sector have made top-50 returns.
As the below chart shows, the sector has outperformed all the other regional smaller companies sectors in the 10 years to 31 July 2017 on a total return basis.
Performance of sectors over 10yrs to 31 July 2017
Source: FE Analytics
In this series, FE Trustnet examines the NAV performance of the trusts – stripping out share price movement – leaving the performance of the underlying portfolio with dividends reinvested.
A fund’s NAV is the amount of money investors would receive per share if all of the underlying assets owned by the fund were sold and distributed to the shareholders.
The top fund in the IT UK Smaller Companies sector over the last 10 years is the four crown-rated Standard Life UK Smaller Companies fund run by FE Alpha Manager Harry Nimmo.
The £307m trust has made a total return of 304.7 per cent over the last decade, above the sector average returns of 157.63 per cent and Numis Smaller Companies ex IT’s 139.28 per cent.
With share price gains stripped out, the fund has returned 256.75 per cent from its underlying portfolio.
Nimmo uses Standard Life’s Matrix as part of his investment process: a quant-based screening system that highlights high-quality businesses with a competitive advantage which should lead to consistent and sustainable earnings growth.
He is also known for running his winners: holding companies through their maturation for as long as he sees value, with a cut-off point if they reach the FTSE 100.
It launched in 1993 with Nimmo taking charge in 2003 when management of the trust moved from Edinburgh Fund Managers to Standard Life Investments.
In its latest factsheet, Winterflood Investment Trusts research analyst Emma Bird noted: “Harry Nimmo is one of the UK’s most highly regarded smaller companies fund managers and Standard Life UK Smaller Companies has delivered extremely strong performance under his management over the last 14 years, attributable to his focus on quality growth.
“The fund is differentiated from its UK Smaller Companies peers by its higher growth bias; Harry Nimmo aims to invest in strong business franchises that have the potential for considerable earnings growth and views valuations as a secondary consideration.
“The manager continues to find good stock opportunities, despite higher market levels, and is optimistic on the medium to long-term outlook for UK smaller companies.”
The trust has a yield of 1.5 per cent and has charges of 1.13 per cent according to the AIC. It is currently trading on a price discount to NAV of 6.3 per cent.
List of trusts
Source: The AIC
The second best performer by net asset value is the five crown-rated Rights & Issues Investment Trust run by Simon Knott, which has returned 247.15 per cent, according to the latest figures from the AIC.
The £181m trust is a high conviction portfolio, with its largest holding – Scotch whisky distillery Scapa – accounting for 14.91 per cent of its AUM.
The trust has achieved top-quartile returns over one, three and five years and has outperformed its sector and benchmark over the last decade.
According to the latest data from the AIC, the trust has a yield of 1.4 per cent and charges of 0.59 per cent. It is on a discount of 11.4 per cent.
Third on the list is the £600m BlackRock Smaller Companies fund run by Mike Prentis, which has NAV returns of 240.06 per cent over the last decade.
Winterflood’s Bird said: “BlackRock Smaller Companies has an impressive long-term performance record, outperforming its benchmark for 14 consecutive years.
“In addition, the fund is the second largest in its peer group, which aids secondary market liquidity, and while its yield of 1.7 per cent is slightly below the peer group average, dividend growth has been strong at 20 per cent per annum over the past five years.
“We rate Mike Prentis highly and believe that the fund benefits from BlackRock's well-resourced small & mid cap team.”
The trust is trading at a 12.8 per cent discount and has charges of 0.97 including performance fees according to data from the AIC.
The next investment company is the £593m Henderson Smaller Companies fund run by Neil Hermon, who celebrates 15 years at the helm of the trust in November.
Analysts at Kepler Trust Intelligence noted: “The trust has two major aspects going for it. Firstly, it has an income element as the dividend has been increased in each of the past 13 years (it currently yields 2.3 per cent and has decent levels of dividend cover).
“Secondly, and more importantly in a world where there is greater scrutiny on cost, the trust has the lowest ongoing charges and management fee in the sector.”
Including share price, the trust has returned 214.01 per cent over the period, the fourth highest overall return in the sector according to FE Analytics.
Performance of fund vs sector and benchmark over 10yrs to 31 July 2017
Source: FE Analytics
With share price gains stripped out, the fund has returned 194.34 per cent from its underlying portfolio.
The trust currently has a yield of 2.3 per cent and has charges of 1.01 per cent including performance fees according to the AIC. It is currently trading at a discount to NAV of 15.2 per cent.
Invesco Perpetual UK Smaller Companies is fifth, having returned 178.13 on a net asset value basis and 232.65 per cent in total returns.
The four crown-rated trust has been run by Jonathan Brown since 2002 with deputy manager Robin West joining the lead manager in 2015.
The £157m investment company aims to achieve long-term total return for shareholders by investing small- and mid-cap UK smaller companies, with large positions currently in industrials, consumer services and financials, as well as technology and healthcare stocks.
In its latest factsheet, the managers said: “The portfolio remains focused on identifying what we regard as quality businesses with strong balance sheets - capable of self-help rather than being overly reliant on the wider economy to stimulate growth.”
The trust has a dividend yield of 3.6 per cent, according to the AIC, with charges of 1.27 per cent including performance fees. It is on an 8.3 per cent discount.
The final UK smaller companies trust among the top 50 companies overall for net asset value returns is the £321m BlackRock Throgmorton Trust also run by Mike Prentis as well as co-manager Dan Whitestone.
It has returned 170.58 per cent on an NAV-basis over 10 years, which rises to 196.58 per cent on a total return-basis.
The trust is diversified, with its 10 largest individual holdings accounting for 21.5 per cent total assets including the likes of veterinary services company CVS Group and distribution service 4imprint Group.
However, it has done so with a high maximum drawdown – which measures the amount of money lost if bought and sold at the worst possible moments – thanks in part to significant losses during the financial crisis of 2008, the European debt crisis of 2011 and again in 2014.
The trust is on a 17.1 per cent discount to NAV, has a yield of 1.9 per cent and charges including performance fees of 1.34 per cent according to the AIC.