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Rolling returns: Giles Hargreave leads small cap funds on top over five-year periods

22 December 2014

In the next article of the series, FE Trustnet analyses the smaller companies sector for funds with a record of consistently outperforming their peers over five years.

By Gary Jackson,

News Editor, FE Trustnet

FE Alpha Manager Giles Hargreave runs half of the UK smaller companies funds that have turned out first-quartile returns over successive five-year periods, FE Trustnet research shows, while regional small cap managers have been much less consistent in beating their peers.

Smaller companies funds are frequently used by investors to diversify away from the dominant FTSE 100 names and, thanks to their more cyclical nature, offer a source of stronger returns.

As the graph below shows, healthy returns have been made by the small companies sectors over the past decade although these have come with greater risk than large caps. 

Performance of sectors over 10 years

    
Source: FE Analytics

In the next article of our series on rolling returns, FE Trustnet examines the IMA UK Smaller Companies, European Smaller Companies, North American Smaller Companies and Japanese Smaller Companies sectors to find out which funds have stayed first quartile over rolling five-year periods back to 2004.

Our study concentrates on the six rolling five-year periods between 30 November 2004 and 30 November 2014, meaning only funds with a 10-year track record have been included in the study.

Within the IMA UK Smaller Companies sector, four funds have been able to consistently stay in the top quartile over this time frame - Marlborough UK Micro Cap Growth and Marlborough Special Situations, both managed by Hargreave; Paul Marriage and John Warren's Schroder UK Dynamic Smaller Companies; and Ken Hsia's Investec UK Smaller Companies.

Of the four, the £556.1m Investec UK Smaller Companies fund has made the most money for investors over the 10 years covered with a 294.67 per cent gain - double the return of its average peer.

Performance of funds vs sector over 10 years



Source: FE Analytics


The fund is managed using Investec’s 4Factor quantitative process, which attempts to find companies that are above average quality and posting earnings upgrades but are still trading on below-average valuations. The process is not entirely quant, as Hsia judges the short list thrown up by it to determine if firms are genuinely attractive or not.

Investec UK Smaller Companies’ largest current overweight is to financial services, with names such as online trading services firm Plus500 and online payments processing company Optimal Payments appearing in its top 10. It’s also overweight the software & computer services and media sectors.

Hargreave (pictured) is regarded as one of the most successful small cap investors in the UK but often attributes the success of his four open-ended funds and two venture capital trusts to having the support of his large investment team, which allows him to cover a vast section of the market. 

Marlborough UK Micro Cap Growth and Marlborough Special Situations appear on the FE Research team’s Select 100 list of preferred funds, where both are described as “one of the strongest UK funds in terms of performance and quality of investment team”.

The FE team also points out that both funds, owing to where they invest on the cap spectrum, can gain or lose as much as 10 per cent in a single day if the market moves for or against smaller companies. However, it notes that Hargreave’s cautious approach means losses are often limited when compared with its peers’.

Schroder UK Dynamic Smaller Companies is also on the Select 100, but the decision to first hard close to new investors then later reopen in October this year means it currently has a ‘hold’ rating while the FE Research team monitors its asset flows.

The fund disappointed investors over the first 10 years of its life but the appointment of Marriage to the portfolio in 2006 saw its record of outperformance begin, thanks to an ability to limit losses in falling markets and beat the benchmark when it’s rising.

“Marriage is a passionate fund manager who demonstrates a genuine interest in the companies he invests in. The process he follows is straightforward and robust,” the team added.

Investec UK Smaller Companies has a clean ongoing charges (OCF) of 0.84 per cent. Marlborough UK Micro Cap Growth and Marlborough Special Situations have respective OCFs of 0.81 per cent and 0.80 per cent, while Schroder UK Dynamic Smaller Companies charges 0.99 per cent.

In contrast, none of the funds in the IMA European Smaller Companies sector have managed to stay in the top quartile over rolling five years, although two have come close.

Mark Heslop and Philip Dicken’s £1bn Threadneedle European Smaller Companies fund and Peter F. Fruzzetti’s €466.6m MFS Meridian European Smaller Companies fund have been first quartile in all one of the six periods. All three of these managers are FE Alpha Managers.

Over 10 years, the average fund in the IMA European Smaller Companies sector has made 185.77 per cent but both of these funds have returned more than 260 per cent, with the Threadneedle portfolio just leading out of the two.

Performance of funds vs sector over 10 years



Source: FE Analytics

Threadneedle European Smaller Companies has a clean OCF of 0.88 per cent while MFS Meridian European Smaller Companies has ongoing charges of 1.97 per cent.


The IMA Japanese Smaller Companies sector also has no funds consistently first-quartile over rolling five years and only one that comes close - Max Godwin and Dean Cashman's £118.9m M&G Japan Smaller Companies.

First-quartile in five of the periods and second quartile in one, this fund has returned 85.45 per cent over 10 years and outpaced its average peers by 25 percentage points in the process. This has come with more volatility than the sector average, but by a very slim margin.

Performance of fund vs sector over 10 years



Source: FE Analytics

M&G Japan Smaller Companies has a 0.96 per cent clean OCF.

The IMA North American Smaller Companies sector has a worse record than its European and Japanese rivals, with no funds consistently first-quartile and none coming close.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.