Evan-Cook, whose five crown-rated Premier Multi Asset Distribution fund has been a top quartile performer in the IMA Mixed Investment 20%-60% Shares sector over one, three and five years, has been a small cap bull over recent years and has benefitted from the sector’s strong performance.However, due to the “stampede of money” that has moved into small caps in recent years, he thinks that now is a good time to move away.
“We have been trimming down our exposure [to UK small caps] over the last six to eight months,” he said.
“They have been exceptionally good for us. We had bought them just after the crash when everyone was saying, ‘whatever you do, do not buy small caps’. People were saying they are domestic UK, they are horrible, they are too risky and we are all going to die.”
“Low and behold, they have been the best performing sector since,” he added.
Performance of indices vs sector over 5yrs
Source: FE Analytics
Evan-Cook warns that the sector is unlikely to repeat these returns.
“We tend to avoid any areas where there are stampedes of money. We love the stuff that people aren’t bothering with,” he said.
“At the moment, our main concern is now small caps. It seems to us that there has been a wall of money going in, which is mainly through good active managers. However, you know when it all hits the fan and when a sell-off happens, these will be the worst hit,” he added.
Cazenove UK Smaller Companies, which is headed up by the FE Alpha Manager duo of Paul Marriage and John Warren, has been one of the most popular funds in the sector due to its track record of consistent outperformance.
Its assets under management have grown from just £50m to more than £1bn over the last three years.
Cazenove decided to hard-close the fund last year to protect its unit holders, but Evan-Cook – who rates the managers highly – has already sold out of it. He says that not only is the sector looking expensive, but because of the fund's size, Marriage and Warren no longer have enough flexibility.
“We tend to be quite glacial with this sort of thing as we tend to move quite early and slowly cut down our allocation. We had owned Cazenove UK Smaller Companies, but we have sold out of it now because it is too big for us.”
“There is also the valuation concern as well, so it is a combination of the two.”
“Paul Marriage is a very good manager, one of the best in the UK, and we have some very happy memories of the fund. However, now he is running that amount of money, he is slightly hamstrung in our opinion,” he added.
Cazenove UK Smaller Companies has been one of the top-three funds in the sector and has beaten its FTSE Small Cap ex IT benchmark over one, three, five and 10 years.
Source: FE Analytics
Our data suggests that while the fund has grown substantially over the last three years, its size hasn’t affected its performance – it has delivered top-quartile returns in each of the last three discrete calendar years.
Nevertheless, Evan-Cook says that it will be an issue for the future.
While the manager says he would like to put money back into smaller companies, he thinks their outlook is tricky over the medium-term.
“We wouldn’t go back into small caps on a macro call, it would be down to valuations and sentiment,” he said.
“It would be when everyone is starting to dislike smaller companies and there are some discrepancies in valuations. However, from a macro perspective, we are starting to de-risk because the cycle seems closer to the end than the beginning.”
In order to de-risk, Evan-Cook has moved his capital into Investec UK Special Situations, which is headed up by star manager Alastair Mundy.
“He has a large cap bias and value also seems a good place to be. Growth has had a very good run and I think value is now under-appreciated,” he said.
Evan-Cook isn’t alone in thinking that large caps now offer the best value, with a number of managers upping their exposure to the FTSE’s biggest names in recent months.
Mundy, who is often viewed as one of the best contrarian managers in the industry, has high exposure to currently out-of-favour FTSE 100 mega caps such as Shell, BP, Unilever and GlaxoSmithKline.
He has managed his £1.1bn Investec UK Special Situations fund since August 2002.
It is a top-quartile performer in the highly competitive IMA UK All Companies sector over that time with returns of 231.14 per cent, beating its FTSE All Share benchmark by more than 50 percentage points.
Performance of fund vs sector and index since Aug 2002
Source: FE Analytics
It is also a top-quartile performer over 10 years. While it has still beaten the sector and the index over one, three and five years, its relative outperformance hasn’t been as vast.
One of the major reasons for this is because, like managers such as Iain Stewart and Martin Gray, Mundy is bearish on the outlook for equity markets.
He has, as a result, avoided some of the more hyped up areas of the market and has tended to maintain a relatively high tactical cash weighting. Cash currently makes up 8.4 per cent of the fund.
Evan-Cook doesn't mind that Mundy isn’t fully invested, however, as while he doesn’t like his managers using cash to try and call the macro, he doesn’t mind them using it if they don’t see much value in the market.
Investec UK Special Situations has an ongoing charges figure (OCF) of 1.59 per cent and requires a minimum investment of £1,000.
