Jonathan Winton and FE Alpha Manager Alex Wright (pictured) will soft-close their £368m Fidelity UK Smaller Companies fund once again on 6 April, it was announced yesterday. 
Both managers have been at the helm of the four crown-rated fund since 2013 and 2008 respectively and will be soft-closing the fund to new investors despite only re-opening last year following a previous two-year closure.
The fund will be closed so that Wright and Winton can retain enough flexibility to pursue their current investment strategy and to ensure they don’t fall victim to illiquidity, according to a spokesperson from Fidelity.
The news is likely to come as a blow to many small-cap enthusiasts who are not in a position to add any holdings to their portfolios over the next month. Since Wright launched the fund, Fidelity UK Smaller Companies has been the top-performer in its UK Smaller Companies sector and has also provided a top-decile Sharpe ratio and maximum drawdown over the same time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
If investors have this fund on their wish list but can’t buy in before it soft-closes or miss the deadline, where else should they be looking for promising opportunities in the small-cap space? We ask a panel of investment professionals which alternative funds they would consider in the below article.
AXA Framlington UK Smaller Companies
Jason Hollands, managing director at Tilney Bestinvest, would choose AXA Framlington UK Smaller Companies, managed by “rising star” Henry Lowson.
The £260m fund has five FE crowns and has two-thirds of its portfolio invested in FTSE Small Cap and AIM stocks, while a further 20 per cent is invested in UK mid-caps. The remainder of the fund is held in a mixture of cash and unspecified holdings.
“Henry has been managing the fund since 2012, a period over which it has delivered better returns than the Fidelity fund,” Hollands said.
Performance of fund vs sector and benchmark
Source: FE Analytics
“While some may be wary to back a manager with a short track record, I take comfort from the fact that he works alongside veteran stock picker Nigel Thomas, who has always held sizeable exposure to smaller companies, and Chris St. John - another talented manager - who cut his teeth as a small-cap manager.”
While many funds that invest further down the cap spectrum experience higher levels of volatility compared to larger peers, AXA Framlington UK Smaller Cos has achieved a top-quartile Sharpe ratio, maximum drawdown and annualised volatility over Lowson’s tenure.
In terms of sector positioning, the fund’s largest weighting is in industrials 35.33 per cent, followed by services at 20.08 per cent, telecom, media & technology at 12.81 per cent and financials at 10.8 per cent. It also has smaller weightings in healthcare, basic materials, oil & gas and consumer products.
“The focus is predominantly on companies with a market cap in excess of £100 million, so this isn't an ultra-racy micro-cap fund or excessively loaded up with AIM shares but very much a thoroughbred, true small-cap fund,” Hollands continued.
“The process is very much about identifying quality growth companies with strong management teams and picking them up at reasonable price. The manager has around 500 meetings with company management in a typical year as part of this process - that's important when you are investing in smaller companies as research coverage from broking firms and investment banks is very thin, so you need to do your own work and that's what can give a manager the edge.”
AXA Framlington UK Smaller Cos has a clean ongoing charges figure (OCF) of 0.85 per cent.
Charles Montanaro, founder of the firm, has been at the helm of Montanaro UK Income since the end of 2012. Over this time frame, the fund has provided a total return of 54.07 per cent, outperforming its sector average by 20.52 percentage points.
Performance of fund vs sector under Montanaro
Source: FE Analytics
Ryan Hughes, fund manager at Apollo, would opt for this fund as an alternative to Fidelity UK Smaller Companies as he believes the manager’s talent has gone unrecognised due to the firm’s focus on European small-caps.
“With an investment team of nearly 30, Charles Montanaro has built the largest dedicated specialist small-cap team in Europe,” he said.
“What is particularly appealing about Montanaro is the very clear investment philosophy and process that the team employs which makes for a disciplined and repeatable approach. A strong focus on taking a long term-approach and only investing in companies that they understand may sound obvious but is often the undoing of many small-cap managers.”
The manager adds that Montanaro doesn’t use external brokers either, and instead relies on a large team of dedicated small-cap analysts to do the research work on all companies.
“This gives great insight and allows the team to live and breathe the companies they research and invest in,” he added.
As the name suggests, Montanaro sits in the IA UK Equity Income space but has a bias towards smaller companies, with less than a third of the fund invested in companies that are more than £2.5bn in size.
The fund aims to outperform its sector average as well as to generate a historic yield on the fund’s distributed income that is more than 110 per cent of the FTSE All Share’s yield over a three-year period.
The fund consists of a concentrated portfolio of 40 holdings, 42 per cent of which are between £1bn and £2.5bn in size. Montanro’s stock selection has led to top-quartile risk-adjusted returns (as measured by the fund’s Sharpe ratio) over his tenure, although the fund does have a below-average annualised volatility over the same time frame.
Montanaro UK Income has a clean OCF of 0.34 per cent and yields 3.7 per cent.
Liontrust UK Smaller Companies
Headed up by FE Alpha Manager duo Anthony Cross and Julian Fosh, Liontrust UK Smaller Companies is the fund that SG Wealth Management’s Neil Shillito would choose as an alternative to Wright’s fund.
“Their process is to invest in companies that have a sustainable competitive advantage which leads in turn to a better-than-average level of profitability,” he explained.
“Easily said admittedly, but they underpin their conviction by only investing in companies where the directors and key employees have equity ownership which aligns their interests with shareholders, employees and leads to better corporate governance.”
The company director adds that Cross and Fosh have also worked together for many years and says that the returns they have produced as a duo are a testament to the success of their partnership.
The managers run a number of other portfolios together including Liontrust Special Situations, Liontrust UK Growth and the offshore Liontrust GF Special Situations.
Liontrust UK Smaller Companies is the top-performing fund that they run though, having outperformed its peer average in the IA UK Smaller Companies space by 43.45 percentage points over five years with a top-decile total return of 103.04 per cent. It is also in the top quartile for its annualised volatility, its Sharpe ratio and its maximum drawdown over both managers’ tenure.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
As with their other portfolios, Cross and Fosh utilise their ‘Economic Advantage’ stock selection process, which means they will only invest in stocks that have a durable competitive advantage over their peers in the form of either recurring business, intellectual property or strong distributions channels.
The £424m fund has a clean OCF of 1.38 per cent.