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Pain for UK small and mid cap funds coming to an end, says Banyard

19 August 2014

The Schroders manager is feeling more optimistic after a torrid 2014 for companies at the lower end of the UK market.

By Daniel Lanyon,

Reporter, FE Trustnet

The rotation out of mid and small caps into large caps has levelled out, according to FE Alpha Manager Rosemary Banyard, who doesn’t expect funds and trusts focused on this area to suffer the same kind of falls as they have so far this year.

Along with many small and mid-cap funds, Banyard’s Schroder UK Smaller Companies fund and Schroder UK Mid Cap investment trust have had a difficult 2014, falling 1.66 and 8.28 per cent, respectively. This is in stark contrast to returns of over 70 per cent for the trust in 2013 and 36.25 per cent in 2012.

Performance of indices over 3yrs

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Source: FE Analytics

UK equity markets have swung from a growth and momentum bias at the beginning of the year to being more concerned with value. This has seen money flow out of domestic mid-caps and into mega caps.

Small and mid cap stocks sold off aggressively in March and throughout the second quarter of the year, after central banks spooked markets by hinting that interest rates could start to rise sooner than expected.

A number of earnings downsides in stocks such as Rightmove and ASOS haven’t helped matters, nor has a a large and speedy rotation away from small and mid caps and a raft of short-selling from hedge funds as highlighted by Harry Nimmo in a recent FE Trustnet article.

The average fund in the IMA UK Smaller Companies sector has lost 1.33 per cent over this period with less than a third beating the FTSE Small Cap index.

ALT_TAG Banyard says the causes of the sell-off were short term in nature and  while she is not outright bullish, she says the rotations is winding up.

“My sense of the bigger picture this year is that two other things have happened. Firstly you have got increased demand for large caps,” she said. 

“The level of bid activity around some of the largest FTSE 100 stocks such as the bid for AstraZeneca, the bid for Shire and the bid for Intercontinental Hotels increased demand and the huge increase in new listings in mid caps increased supply.”

“That has had an effect, because asset allocators have suddenly thought that they need to have more FTSE 100 and need to sell mid caps.”

“There has also been a very difficult backdrop with Mark Carney making these pronouncements which are variable and confusing and the market reacting to those, particularly to domestic cyclicals.”

While the manager says 2014 has been difficult to add value, the market looks to be recovering, particularly at the smaller end of the cap spectrum.

She says compared to a year ago it is still currently harder to find new mid cap stocks to buy.

“It does still feel as if the mid cap area has been crawled over quite a lot but the small cap space continues to be the preserve of the specialist,” she said. 

According to FE Analytics, the £176.5m Schroder UK Mid Cap trust has fallen 8.28 per cent since the beginning of the year from a total return point of view.

Performance of trust, sector and index in 2014


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Source: FE Analytics

Part of the fall can be explained by the trust moving from trading at par to a discount of 7.9 per cent over the period.

The £500m Schroder Smaller Companies fund is also down in 2014. It has lost 1.66 per cent compared to a sector average loss of 1.31 per cent.

Performance of fund, sector and index in 2014

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Source: FE Analytics

Banyard says the market conditions plus an elevated sense of political risk in the UK and abroad led her to reduce gearing in the trust and raise cash back in April.

“The market has had to contend with a huge international disturbance, with Israel/Gaza, Russia and the whole Middle East you have a lot of uncertainty and so markets have had to cope with that,” she said. 

“There has also been a fair amount of uncertainty in the domestic world about policy ahead of the Scottish Independence vote and the 2015 election.”

Ben Willis, head of research at Whitechurch Securities says despite the fall in mid and small caps it may be too soon to buy back in.

“The base that they have come from makes them look a little expensive and while you have seen a price rerating you want to wait for companies to come out and announce in their earnings results that they are making profits and they are beating estimates,” he said.

“This would suggest we are going to get another leg in the market and there’ll be more demand for their shares but you would have to see a bit more of a correction for that to happen.”

Jamie Hooper, manager of the AXA Framlington UK Growth fund, thinks the trend of mega cap outperformance is set to continue for the rest of 2014, but expects mid-caps to return to outperformance before long.

This view is also shared by FE Alpha Manager Harry Nimmo, whose £1.2bn Standard Life Investments UK Smaller Companies fund was hit significantly harder than his peers.

Banyard says the other major challenge this year has been the strength of sterling, although she says she expects this to improve.

“This has hit industrials mostly whereas retailers, for example, can buy things from the Far East more cheaply. It has eased up in recent weeks as markets have thought that a rate rise may be further away.”

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