Domestic facing stocks have been the biggest beneficiaries of the increasing confidence in the UK recovery – an area heavily represented in UK small cap funds.
The strong performance has led to worries over valuations from some quarters, with many industry experts forecasting a more difficult period for companies in the Numis Smaller Companies (ex IT) index.
There’s no doubt that there is a great deal of long-term potential in the small cap market, but for those worried about weakness in the shorter-term, a manager who has a proven track record in both good times and bad is high on the list of priorities.
Here are two worth considering for your portfolio.
Marlborough Micro Cap Growth
FE Alpha Managers Giles Hargreave (pictured) is best known for his Marlborough Special Sits fund, but his UK Micro Cap Growth fund has an even better record since he started running it in 2004.
The manager has led it to consistent outperformance in a number of market environments.
It predicted better that its sector and the Numis index in the down years of both 2008 and 2011, and has successfully kept up in the fast rising markets of 2009, 2010, 2012 and 2013.
The last calendar year Marlborough UK Micro Cap Growth failed to beats the IMA UK Smaller Companies sector average – which is also its benchmark – was back in 2005.
Source: FE Analytics
Unsurprisingly, the fund’s consistency means that it’s a top quartile performer in its sector over a one, three and five year period.
As its name suggests, the £329m portfolio focuses on companies further down the market cap scale than Special Situations. Around 75 per cent of the fund’s assets are invested in companies with a market cap less than £250m, with no company any larger than £1bn.
Though micro cap companies tend to be more volatile areas of the market, Hargreave’s excellent stock picking and emphasis on diversification has seen him perform better than his peers in sell-offs. FE data shows that the fund has a lower annualised volatility than both its sector and the Numis index over a five year period.
Risk/return of funds, sector and index over 5yrs
Source: FE Analytics
No single company has more than a 2 per cent weighting in the fund, and Hargreave currently holds more than 300 stocks, meaning he is insulated from stock specific issues and all-out defaults.
Such a high level of diversification goes against quantitative research that suggests it’s impossible to outperform the market with so many individual positions. Hargreave is something of a special case, it seems.
He’s an active manager of cash, which currently has an 11.3 per cent weighting in the portfolio. As well as using it in anticipation of market corrections, Hargreave always puts some cash to one side for liquidity reasons.
Rob Gleeson and his FE Research team rate Marlborough Micro Cap Growth very highly, insisting it is one of the strongest funds in the IMA UK Smaller Companies sector.
“Marlborough UK Micro Cap Growth is one of the best UK funds in terms of performance and quality of investment team,” the team said.
“Stockpicking is the main driver of performance in micro cap investing, which puts the emphasis on in-depth knowledge of companies and works in this fund’s favour.”
The five-crown rated fund has clean share class ongoing charges of 0.81 per cent. Guy Feld has been deputy manager on the fund since 2012.
Baillie Gifford British Smaller Companies
The £213m Baillie Gifford British Smaller Companies fund has more of a small to mid cap focus, holding much larger companies such as the likes of online retailer ASOS in its top-10.
It has a higher volatility profile than Marlborough, taking much punchier positions in single stocks; however, the fund has a very good record in both up and down markets. It was one of the few funds that actually made money in 2007, and lost more than 12 percentage points less than its sector in 2008.
The fund has been first or second quartile in eight of the last 10 years, only falling into the bottom quartile in the rebound year of 2009. It is top quartile over a one, three, five and 10 year period, and is also ahead of its FTSE Small Cap (ex IT) benchmark.
Performance of fund, sector and index over 10 years
Source: FE Analytics
The fund was taken over by Andrew Strathdee at the back end of last year, in place of Douglas Brodie. Strathdee has been at Baillie Gifford for almost 20 years, and has been running UK portfolios for the past decade.
The small cap team targets companies with strong earnings per share and cash-flow growth characteristics, which tend to perform better in down markets. Strathdee has a very low turnover, and like all Baillie Gifford managers has a very long-term approach.
The fund has four FE crowns, and clean share class ongoing charges of 0.7 per cent.
