Over the last few months, UK small and mid-cap funds have performed particularly well following the election of a majority government, a strong economy and a boost in consumer confidence. 
What’s more, the recent FTSE sell-off has led many investors to turn their attentions away from blue chips and focus their attentions on off-the-radar stocks.
In an article published on Thursday, Hargreaves Lansdown’s Mark Dampier told FE Trustnet that small and mid-caps also provide stellar investment opportunities over the long term and not just while markets are falling.
“If the market falls lots and lots, then yes small caps will eventually fall too, but I have to say that I view a fall as a buying opportunity most of the time – it’s very cliché to say that but, unless you think it’s the death of capitalism, falls in markets are usually buying opportunities,” he said.
“Mid and small cap areas are where you find the best active fund managers, in my view. The more doom and gloom I hear from the media, the more bullish I become.”
In light of this, Meera Hearnden (pictured), senior investment manager at Parmenion, tells FE Trustnet her top five small and mid-cap funds and why they could be a valuable addition to investors’ portfolios.
Liontrust UK Smaller Companies
Managed by FE Alpha Manager duo Anthony Cross and Julian Fosh, this £369m fund aims to outperform the FTSE Small Cap index via its portfolio of 58 stocks.
“This is managed by two very experienced managers who have a clearly defined process focusing on intangible assets that generate consistent, repeatable earnings and cash flows that are under appreciated by the market,” Hearnden explained.
“This approach means the fund has a quality bias and has delivered attractive long-term returns.”
Since Cross first took the helm of the fund in 1998, it has achieved a return of 660.18 per cent, outperforming its benchmark by 468.72 percentage points and its peer average in the IA UK Smaller Companies sector by 254.17 percentage points.
Performance of fund vs sector and benchmark over tenure
Source: FE Analytics
Over the same time period, the fund boasts a top-quartile annualised volatility, Sharpe ratio, which measures risk-adjusted performance, and alpha, which measures performance in excess of the benchmark.
Cross and Fosh’s long and consistent track record for adding value through stock-picking while also monitoring risk has won the fund a place on the FE Research Select 100 list.
However, the FE Research team warns that the fund can lose significant amounts of money over the short term, and may get left behind when markets rally on the back of hot news.
Liontrust UK Smaller Companies has a clean ongoing charges figure (OCF) of 1.38 per cent and yields 0.29 per cent.
This five FE Crown-rated fund has been managed by FE Alpha Manager Mark Martin since 2008 and invests primarily in stocks listed on the FTSE 250 and the biggest 50 stocks from the FTSE Small Cap index.
“The fund takes advantage of the diverse nature of companies in the mid-cap universe,” Hearnden said.
“It has a disciplined approach with a concentrated portfolio of 30 to 40 stocks. The track record speaks for itself, returning comfortably more than its index over the last five years.”
Martin has split the fund’s portfolio into three groups – structural growth, which focuses on sectors that still grow when the economy is sluggish; recovery, which includes companies that he expects to do well if the economy improves; and self-help stories, which are underperforming companies he expects recuperate.
The manager believes this method improves the fund’s chances of outperforming regardless of the economic climate. Since the fund’s launch in December 2008, it has returned 330.95 per cent, which is more than double its peer average in the IA UK All Companies sector.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
What’s more, the fund has also performed very well over the short term, delivering top-decile returns over one, three and five years, as well as over one, three and six months.
Despite the £591m fund’s strong performance, the FE Research team has placed the fund on hold from the FE Research Select 100 list, as they believe there are better opportunities at the moment away from mid-caps.
Neptune UK Mid Cap has a clean OCF of 0.81 per cent and yields 1.08 per cent.
Managed by Rosemary Banyard and FE Alpha Manager Andrew Brough, the £531m fund has achieved a top-decile Sharpe ratio, annualised volatility and downside risk ratio over five years.
As such, the fund is popular among many investors who want exposure to smaller companies while maintaining a relatively smooth ride over the longer term.
The fund is also arguably lower risk because it holds more than 100 stocks, meaning the managers don’t adopt a high-conviction investing process. This is due to the fund’s size, which prevents it from owning too much of an individual company.
“Over three and five years the fund has delivered attractive risk adjusted returns – this has been achieved through emphasis on detailed research of companies with pricing power, strong business franchises and balance sheet strength,” Hearnden explained.
Banyard and Brough’s stock selection is based on Schroders’ equity research. According to the FE Research team, this tends to involve companies that are subject to takeovers that the managers can exploit, or companies that have pricing power over their competitors.
Over three and five years, the fund has achieved a top-quartile return of 80.95 per cent and 142.14 per cent respectively.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, over 10 years, the fund has slipped into third quartile as it was hit particularly hard during the financial crash.
Schroder UK Smaller Companies has a clean OCF of 0.91 per cent and yields 1.02 per cent.
Marlborough Special Situations
Marlborough Special Situations has been managed by FE Alpha Manager Giles Hargreave since 1998, who was joined by co-manager Eustace Santa Barbara last year.
The £894m fund specifically looks at less developed businesses, which are scrutinised by a team of nine analysts.
“The fund has a long history with the manager Giles Hargreave, who is supported by a close knit team,” Hearnden said.
“As the team recognises that smaller companies can be illiquid, they manage a highly diversified portfolio of more than 200 stocks. This diversity has not diluted returns, but on the contrary has added enormous value.”
More than a third of these stocks are industrials. The fund has a 20.3 per cent weighting in services, 15.8 per cent in financials and 9 per cent in telecom, media and technology, as well as smaller weightings in healthcare, consumer products and basic materials.
Over the last 10 years, the fund has achieved a top-decile return of 251.47 per cent, which is 100 percentage points more than its sector average.
Performance of fund vs sector
Source: FE Analytics
What’s more, the fund boasts a top-decile annualised volatility and Sharpe ratio over the same time period.
Marlborough Special Situations has a clean OCF of 0.8 per cent and yields 0.94 per cent.
The five FE Crown-rated Unicorn UK Income fund has been managed by Fraser Mackersie and Simon Moon since the sad passing of previous fund manager John McClure last year.
McClure had a substantial investor following during his time on the fund and was one of the first managers to successfully implement a small and mid-cap approach to the dividend-paying market in the UK.
As such, MacKersie and Moon certainly had big boots to fill. However, it seems that the fund is performing fairly well over their tenure so far, returning 7.45 per cent and outperforming its FTSE All Share benchmark by 2.65 percentage points.
Performance of fund vs sector and benchmark over tenure
Source: FE Analytics
“Whilst strictly speaking not in the small-cap sector, the fund has a mid and small-cap bias which has been the main contributor of long-term performance,” Hearnden explained.
“Despite the initial uncertainty over the new managers, they have picked up the baton from the previous manager, and have applied the same process centred on fundamental company analysis in niche areas with sustainable competitive advantage. So far, the new managers are delivering excellent results.”
Since Mackersie and Moon took over the fund’s helm, annualised returns have been bottom-decile. However, the fund managers had worked with McClure for around six years and say they are “fully indoctrinated” into his successful process.
Unicorn UK Income has a clean OCF of 0.81 per cent and yields 5.3 per cent.