FE Alpha Manager Philip Rodrigs’ £550m R&M UK Equity Smaller Companies fund has been soft-closed to new investors this morning owing to strong inflows over the past 12 months, according to a spokesperson from the group.
While the group says the strategy’s capacity is much larger than its current size, in order to protect existing unitholders it has acted on last year’s note to investors by closing the fund now its AUM has surpassed £550m.
The five crown-rated fund has seen considerable inflows over recent years, as its assets have increased by five fold since January 2014 – though it is understandable why R&M UK Equity Smaller Companies has proven to be so popular.
Firstly, its management team of Rodrigs – who previously managed Investec UK Smaller Companies prior to taking on the R&M fund in September last year – and fellow FE Alpha Manager Daniel Hanbury are highly respected within the industry.
Secondly, thanks to the group’s sophisticated quantitative screening system – which categorises companies by characteristics such as growth, recovery, asset backed and quality and is referred to by the team as ‘Moneypenny’ – it has been the best performing portfolio in the IA UK Smaller Companies sector over three years and has comfortably outperformed since its launch in November 2006.
Performance of fund versus sector and index since launch
Source: FE Analytics
The group is quick to point out that it will be “business as usual” for existing unitholders but for those who had the top-performing fund on their shopping list, in this article we take a close look at three portfolios which could act as alternatives.
The first and most obvious choice could be the five crown-rated Fidelity UK Smaller Companies fund, which is headed up by FE Alpha Manager Alex Wright and only recently re-opened its doors to new investors following a similar soft-closure a couple of years ago.
Unlike R&M UK Equity Smaller Companies, the £260m fund is a value/contrarian portfolio thanks to Wright’s proven strategy of buying out-of-favour companies where he sees a catalyst for positive change.
We say “proven” as, according to FE Analytics, it has been the best performing portfolio in its sector and has easily beaten its benchmark – the Numis Smaller Companies ex IT index – since its launch in February 2008 with returns of 286.76 per cent.
It has also beaten the sector and index in each full calendar year since inception, which includes falling markets like 2011 and strongly rising ones like 2013.
Source: FE Analytics
“[Wright’s] focus on downside risk and subsequent protection of capital in severe sell-offs can be viewed as an extremely sensible approach in what has, historically, been a volatile asset class,” Square Mile, who has given the fund an ‘AA’ rating, said.
It added: “This approach has proved very successful since the fund's launch and though there will be periods when this style of investing is out of favour it should reap rewards over the long term.”
The fund, which has an ongoing charges figure (OCF) of 1.18 per cent, is considerably overweight industrials and holds 72.4 per cent in companies with market-caps below £1bn.
Clearly, however, while the fund has recently been re-opened to investors the chances are high that the group will soft-close again in the not-too-distant future if inflows were to pick-up significantly again. Investors should also be aware that Wright is now in charge of Fidelity’s flagship £2.8bn Special Situations fund.
Given that yet another small-cap fund is nearing capacity, investors may want to choose a fund which doesn’t have any size issues at this point in time.
Unfortunately, though, due to the nature of the industry, most of the funds that have a strong track record and are highly rated by analysts are already the largest. One exception to the rule, however, is the £160m Franklin UK Smaller Companies fund.
It has been one of the sector’s worst performers over the longer term thanks to the process implemented by former manager Stuart Sharpe, but has gained a strong following of industry experts thanks to its new team of Richard Bullas and FE Alpha Manager Paul Spencer.
The likes of Premier’s Simon Evan-Cook rate the Leeds-based duo highly as a result of their more pragmatic approach, which has meant the fund is now comfortably outperforming the sector and its benchmark since they took charge in June 2012.
Performance of fund versus sector and index since June 2012
Source: FE Analytics
The managers made a variety of changes to the portfolio when they were handed the mandate such as reducing the number of holdings, increasing liquidity by moving out of micro-caps and AIM-listed stocks and disposing of the fund’s high weighting to oil and gas.
Given these changes, AXA Wealth’s Adrian Lowcock says the fund is one of his favourite in the sector at the moment.
“[Bullas and Spencer] are pragmatic managers with a three-pronged approach; the backbone of the fund is composed of high quality, steady growth companies. These are complemented by under-appreciated and undervalued companies,” Lowcock said.
“The final prong is recovery stories which tend to be more cyclical in nature.”
Franklin UK Smaller Companies has an OCF of 0.84 per cent.
BlackRock Smaller Companies IT
There is always the chance that the Franklin fund becomes increasingly popular and has its own size issues in the next few years, of course, so investors may want to use R&M’s recent soft-closure as an opportunity to take a closer look at investment trusts.
Not only do trusts rarely face liquidity issues due to their closed-ended structure, but because of weak appetite for small-cap trusts prior to the general election and sustained outflows from the open-ended peer group, the IT UK Smaller Companies sector is now trading on a wide 10.4 per cent discount to NAV.
One top-performing trust, which is now trading on a significant double-digit discount, is Mike Prentis’ BlackRock Smaller Companies IT.
According to FE Analytics, it has been the sector’s second best performing portfolio over 10 years and has beaten its Numis Smaller Companies ex IT benchmark by more than 160 percentage points with returns of 363.33 per cent.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
Thanks to Prentis’ focus on growth-orientated companies, it is also outperforming over one, three and five years.
Despite that performance BlackRock Smaller Companies is currently trading on 12.25 per cent discount, which is much wider than its three-year average, according to the AIC.
The team at Numis Securities also thinks it looks attractive at the moment as it says there is potential for its current discount to narrow significantly if sentiment towards the asset class turns more positive.
“BlackRock Smaller Companies benefits from an experienced manager and a strong track record through a focus on UK smaller companies with a growth bias,” Numis said.
“As one of the most liquid funds in the sector, we believe it offers investors attractive access to a diversified portfolio of high quality growth companies typified by strong balance sheets and proven management teams.”
The trust has gearing of 9 per cent and has ongoing charges, excluding a performance fee, of 0.71 per cent.
