A high-risk approach has cost the highly rated Close Special Situations fund dearly in the latest market correction, FE data shows. 

The five-crown fund, which had been the top-performer in the entire IMA universe over three years for much of 2011, has lost 14.6 per cent so far in 2012. 

That figure puts it very close to the foot of the performance table year-to-date; only specialist commodities funds such as CF Ruffer Baker Steel Gold and Schroder ISF Global Energy have lost more. 

The recent poor run has seen the fund’s three-year record worsen dramatically. Returns of 41.61 per cent over this period are lower than the 54.34 per cent achieved by the average UK Smaller Companies fund over the period. 

Performance of fund vs sector over 3-yrs



Source: FE Analytics

FE Alpha Manager Deryck Noble-Nesbitt, who heads up the £14.4m portfolio, is not averse to taking on risk and this has resulted in the fund holding the highest annual volatility score in the UK Smaller Companies sector over the last five years. 

"The trouble with the markets the way they are at the moment is that they have compelled investors to look at their portfolio too often," said Hargreaves Lansdown’s Meera Patel. 

"Investment funds are for the long-term and there is nothing wrong with having a bit of risk in your portfolio if you’ve got a long time horizon because the rewards can be outstanding." 

Noble-Nesbitt explained to FE Trustnet back in November, amid similar market turmoil, that he was buying companies with high levels of debt because he felt they were attractively valued after being ignored by the market in the flight to quality. 

While recent returns have been disappointing, the manager tends to outperform dramatically in rising markets.

In 2009 alone the fund made 246.87 per cent compared with 31.56 per cent from the average small-cap fund. 

Noble-Nesbitt's performance during this period has contributed greatly to a strong showing over five years. In this period he has returned 14.24 per cent versus a loss of 3.39 per cent from the sector. 

Market dips have historically been damaging to the fund. Noble-Nesbitt recorded above-average losses in both 2008 and 2011 in the Special Situations fund and the Close Beacon Investment portfolio, which he also runs. 

Year-on-year performance of funds vs sector 

Name	2012 returns (%)	2011 returns (%)	2010 returns (%)	2009 returns (%)	2008 returns (%)
Close - Beacon Investment	-3.69	-8.95	17.47	185.81	-59.86
Close - Special Situations	-14.59	-14.48	24.03	246.87	-57.26
IMA UK Smaller Companies	6.08	-9.04	31.56	50.18	-40.54

Source: FE Analytics

With so much competition from top-quality managers in the UK Smaller Companies sector, Patel says that investors need to think very carefully about whether they can tolerate this kind of volatility. 

"With the likes of Giles Hargreave, Daniel Nickols and Paul Marriage in the sector we’ve opted not to put Close Special Situations on our list of recommended funds because we’ve felt that the manager takes on a lot of stock-specific risk," she explained.

"I’d rather pick a manager with a proven investment process in lots of different market conditions."