Cockerill, who is investment director at the group, admits that valuations on small caps are less attractive than they were a few years ago since their stellar run after the crash; but he says investors would be wrong to avoid them as a result.
Performance of indices over 5yrs
Source: FE Analytics
“I’m very much about the long term and I think smaller companies fit that requirement,” Cockerill said. “The reason I like having them in my portfolio is because you should be buying into businesses that have the ability to grow at a significantly faster rate than FTSE 100 stocks.”
One fund which Cockerill is backing is R&M UK Equity Smaller Companies.
The five crown rated fund is currently headed up by FE Alpha Manager Daniel Hanbury, though he will be joined by fellow FE Alpha Manager Philip Rodrigs, who recently announced he would stand down as manager of the five crown rated Investec UK Smaller Companies fund.
“They have a sensible process. It is a nice set up and a good quality team,” Cockerill said. “It’s not a very big fund and they have a quant screening system, which they call “Moneypenny”, which has become more complete and efficient over time.”
“They look for stocks that fit their PVT (potential, value and timing) model and will invest across four types of companies – growth, quality, recovery and asset-backed.”
“For me, it is all about diversification in a portfolio and I like the balance this fund gives me.”
The now £203m fund was launched in November 2006 and was managed by Hanbury since inception through to 2010, at which point Richard Staveley took over the portfolio.
However, Staveley left the group last year and the portfolio was once again handed to Hanbury last July.
According to FE Analytics, during Hanbury’s second stint as manager, the fund has been the third best performing portfolio in the IMA UK Smaller Companies sector with returns of 44.9 per cent and has beaten it benchmark – the NUMIS Smaller Companies ex IT index – by 21.85 percentage points.
Performance of fund vs sector and index since July 2013
Source: FE Analytics
The fund differs to most others in the sector as not only does it have an overweight position in FTSE AIM, it currently holds 16 per cent in cash and its largest holding is a gold bullion exchange traded fund (ETF).
The fund has a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.7 per cent.
Cockerill also owns units in the Invesco Perpetual Global Smaller Companies fund.
“The Invesco team take a long term view on the companies they hold and invest across global equity markets as the dynamic of smaller companies is going to be the same wherever you look around the world.”
“It’s a diversified portfolio; although I appreciate it may be too diversified for some people. However, it spreads the risks – which you inherently get from smaller companies – in my opinion,” Cockerill said.
According to FE Analytics, the £540m Invesco Perpetual Global Smaller Companies fund has been the fifth best performing portfolio in the IMA Global sector over 10 years with returns of 204.7 per cent. However, it has underperformed against one of its small-cap rivals – McInroy & Wood Global Smaller Companies – over that time.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund is very diversified as it is comprised of 398 holdings. However, it could be a useful portfolio for investors who don’t want to be overly reliant on domestic stocks as the UK makes up less than 10 per cent of its assets.
The fund’s clean share class has an OCF of 1.2 per cent.
While Cockerill is bullish on smaller companies, a number of experts have warned that investors who are buying them for their ISA this year could be entering at the top of the market given their stellar returns over the last five years.
Cockerill admits that there a greater risks buying small-caps now compared to times over the last half a decade due to how well they have performed.
“It is important to keep an eye on where we are in the cycle,” Cockerill said. “Yes, smaller companies have had a great run already and we need to see economies around the world continuing to recover because the rally is at risk if they don’t.”
He says investors should look at the current risk profile portfolio before making a decision on whether they want to add smaller companies funds to their portfolio.
He says investors do have tough dilemma will have set money aside to invest now and will therefore want to do it. However, he offers possible investors reasons to why they should consider buying smaller companies funds now.
“Do think that smaller companies will beat a FTSE 100 tracker, bonds or cash over any decent period of time? Yes, but that’s all things being equal. If you were to buy today but then Russia invades Ukraine, smaller companies are likely to fall further.”
He added: “However, say over the next five years large caps only deliver 5 per cent return per annum, I would expect smaller companies to double that. You may not see the returns you have had over the last five years, but I think they will still outperform large-caps on a relative basis.”
