A looming reversal in the fortunes of microcaps relative to small and mid-caps stocks is just one space investors can expect to find upside in the coming few years amid a ‘challenging’ market for most asset classes, according to Miton’s Gervais Williams.
Williams (pictured), who is the manager of several smaller company focused funds and trusts at Miton including the £468m CF Miton UK Multi Cap Income fund, says while it has been a relatively good period for smaller companies funds over the past year, those focused toward micro-cap and AIM stocks have suffered from the preference for small and mid-caps by investors.
“The smaller companies sector has been somewhat out-of-fashion. Over the last year the FTSE Small Cap excluding investment trusts index has generated a positive return of 8.6 per cent in that period while the FTSE AIM All-Share Index has fallen 4 per cent,” he said.
“The pattern of the market appears to be changing. Although UK equities have drifted higher after the election, the FTSE All Share index only rose 1.4 per cent in May. In contrast, there is greater interest beginning to be seen in stocks down the market capitalisation range where valuations are less demanding."
“We believe that many UK smaller companies funds have much of their capital invested in small and mid-sized companies, and these have been at the better end of the performance spectrum over the last year.”
According to FE Analytics, the mid cap space has overwhelmingly been the best part of the UK equity market to be invested over the past year followed by small caps. The FTSE 250 has gained 14.51 per cent while the FTSE Small Cap index has gained 8.01 per cent. Large caps have been mostly flat while the AIM market has fallen 2.46 per cent.
Performance of indices over 1yr
Source: FE Analytics
Williams says much of his £124m CF Miton UK Smaller Companies fund is held in the small to micro-cap end of the capitalisation range, which has led to a poor period of performance as a result.
“We would rather hope that there is good reason for the fund to enjoy a period of performance catch up now that the market trends are changing,” he added.
While the fund is bottom decile over one year, it remains the sixth best performing portfolio [out of 51] in the IA UK Smaller Companies sector since it launched back in December 2012.
Performance of fund, sector and index since launch
Source: FE Analytics
A recent FE Trustnet study found that UK small-cap funds and trusts have seen a significant surge in performance over the past few months despite a sell-off in most global equity markets including the FTSE 100.
David Jane, manager of the £365m CF Miton Cautious Multi Asset fund is backing property as an asset class to stay ahead of a market which he believes is complacent about risks in the eurozone and the US.
“In coming months, the market narrative will likely be dominated by central bank action, the Greek situation and the health, or not, of the world economy, in particular the US economy. We might have expected more clarity on the last two areas before now. Markets have got so used to the eurozone crisis that it just doesn’t feel like a crisis anymore. That said, the consensus for muddling on through, will at some point feel like complacency, as markets get tested,” he said.
“In terms of the US economy, the various distortions of the first quarter data are slowly being given proper context, as the data for the second quarter continues to build. Again, perhaps, any clarity might be longer than expected in coming.”
“The chatter will no doubt remain around the timing of any rate rises, with fears swinging between ‘too much too early’ or the Fed being ‘behind the curve’. Our base case remains for low growth and active central banks but, as ever, our portfolios are positioned for a range of scenarios.”
Jane has kept an overweight to property over the past nine months or so helping to keep the fund ahead of its sector average.
Performance of fund and sector over 1yr
Source: FE Analytics
Jane is evenly spread across developed stock markets but is more cautious on bonds, retaining short duration positions in credit rather than government debt. Property is his biggest material overweight while exposure to commodities is minimal.
Property is an increasingly favoured asset class for investors – both professional and private – looking for income but put off by historically low yields in the bond market. A recent poll of financial advisers by FE Trustnet found that the majority believe property will perform better than both equities and bonds in the second half of 2015.
However, the wall of money that has flowed into the commercial property from retail investors is a worry for some. F&C’s Gary Potter – who co-manages the firm’s fund of funds range – says it is a herd trade which is giving him ‘cause for concern’.
“Frankly I’m staggered – and I know that’s a strong word – by the euphoria that’s surrounding property once again. I think there are some good opportunities in property but if you look at what happened the last time you had this much cash going into commercial property funds, it wasn’t good. That really scares me,” he told FE Trustnet recently.