Small caps have historically returned more over the long-term however, and while returns may be lacklustre in the shorter-term, the impact this would have for those with a 20 or even 10 year time horizon is likely to be minimal.
For those who are unfazed, FE Alpha Managers Giles Hargreave and Harry Nimmo have the longest record of outperformance of any in the sector, and currently run more money than any small cap manager. They both run a number of open and closed-ended portfolios between them, but they remain best-known for their two flagship vehicles.
Performance
Nimmo launched his now £1.4bn Standard Life UK Smaller Companies fund in January 1997, while Hargreave took over his £836m Marlborough Special Situations fund 18 months later in July 1998.
FE data shows that Hargreave has a considerably stronger long-term track record than his rival, with Marlborough Special Sits returning a hefty 1,650.59 per cent since he has been in charge. Nimmo’s fund has outperformed the sector over that time, but returns of only 445.41 per cent.
Performance of funds vs sector since July 1998
Source: FE Analytics
It’s important to point out, however, that much of the outperformance – especially relative to Nimmo (pictured) – came in the first few years of Hargreave’s tenure.
He is renowned for his preference for micro-cap stocks and our data shows that his fund was one of the prime beneficiaries of the dotcom bubble, returning a staggering 180 per cent in 1999. Mass inflows have made Hargreave’s ability to tap into these kinds of companies more difficult in recent years however, and the funds have a more similar return profile over the last decade.
Looking over a cumulative 10 year period, Nimmo was outperforming his rival until the beginning of this year, but steep losses of 10 per cent year-to-date has seen him fall behind. He’s still well ahead relative to the sector over the decade, but has fallen behind over one, three and five years.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The major reason for recent losses has come down to stock specific issues, with eight of his current top-10 holdings losing money this year. Six of those have lost more than 19 per cent, with SuperGroup and ASOS leading the way with -34 per cent and 55 per cent respectively.
FE Trustnet covered ASOS’s fall from grace in an article earlier this year.
Hargreave’s fund has by no-means shot the lights out this year, but is up 2 per cent.
Unlike Nimmo, only one of his top-10 holdings has lost money year to date: FTSE AIM listed- support services company Regenersis.
Cutting down on single stock risk is something of a priority for Hargreave, who is renowned for running a very diversified portfolio. He currently holds 220 companies with the top-10 accounting for 12 per cent of assets, while Nimmo has a much more concentrated fund of 68 stocks, with the top-10 accounting for 32 per cent.
Though the fund is far more diversified in terms of stock weightings, Marlborough Special Sits hasn’t necessarily protected its investors better than Nimmo’s fund during periods of short and severe market weakness, however.
During the crash year of 2008, for example, Standard Life UK Smaller Companies lost 33 per cent, outperforming the Marlborough fund by more than 5 percentage points.
Performance of funds vs sector in 2008
Source: FE Analytics
Marlborough Special Sits has a lower volatility over the long-term thanks in no small part to his greater number of stocks, but Standard Life UK Smaller Companies has a lower max drawdown, which measures how much an investor would lose if they bought and sold at the worst possible times.
Charles Younes, analyst at FE Research, points out that Hargreave has a much higher turnover than Nimmo, and tends to hold the bulk of his assets in small caps. This goes some way in explaining why his fund has tended to lose more in times of market stress, as small caps tend to get hit much harder than their larger counterparts.
Nimmo, on the other hand, has a much lower turnover, and has the freedom to retain his exposure to stocks even when they enter the FTSE 100 as large caps.
“He is far more focused on underlying earnings growth, and while he won’t pay over the odds, he doesn’t mind paying up for quality and holding onto his winners,” Whitechurch’s Ben Willis said. “His approach is best described as GARP [growth at a reasonable price].”
Nimmo told FE Trustnet last year that his style means the fund will underperform when markets hit their recovery stage after a significant slump, but will perform better during flat and falling markets.
The expert’s view
Willis rates both managers very highly and believes Standard Life UK Smaller Companies and Marlborough Special Situations would be a good addition to any portfolio.
He says the decision on which one to choose, however, depends on what investors want from their IMA UK Smaller Companies fund.
“Giles is a bit more flexible and a bit more active. He is all about picking tomorrow’s largest companies today. He is very much about delving into micro caps and he basically coined the phrase ‘nano-caps’,” Willis explained.
Willis says that Nimmo’s fund should no-longer be described as an out-and-out smaller companies fund because the manager has significant mid and even large-cap exposure.
FTSE 100 financial services company Hargreaves Lansdown, which Nimmo originally bought as a small cap, is a good example.
Nimmo holds 3 per cent of his fund in the FTSE 100 and 57 per cent in the FTSE 250. Hargreave, on the other hand, holds more than 70 per cent of his fund in small and micro-caps, even though his fund is approaching the £1bn mark.
Willis says that both funds are different portfolios than they were 15 year ago, but believes Marlborough remains the “purer” small cap play.
“You can tell with Hargreave that his real passion is still very small companies – it’s where he gets his most enjoyment,” he said.
“Yes, he has had to invest in some larger companies over recent years and he has admitted that’s due to size constraints. However, he is still fishing around in the micro-cap space which is somewhere Nimmo won’t go.”
“It is a bit more a pure play I suppose, as you are still getting a genuinely small-cap bias.”
While both funds are very large compared to their sector, Willis says that at £1.4bn Nimmo doesn’t have good enough liquidity to invest all of his money in small caps. Standard Life UK Smaller Companies has officially soft-closed, but can still be accessed via many major platforms.
Willis adds that liquidity is less of any issue for Marlborough Special Situations because it doesn’t tend to hold more than 2 per cent in any one company.
Marlborough Special Sits has ongoing charges of 0.8 per cent, while Standard Life UK Smaller Companies is a touch more expensive at 0.99 per cent.
Those who want exposure to an even more flexible version of Marlborough Special Sits may be tempted by Hargreave’s £407m UK Micro Cap Growth fund, which is entirely invested in small and micro-caps.
