Investors looking to cash in on a quick profit, or holding on for the long-term should consider adding UK small caps, while US growth has worked for investors with a medium-term outlook, data interactive investor (ii) has found.
Starting at 25 years, the best performing fund has been the Marlborough Special Situations making 4,289.9%. Managers Eustace Santa Barbara and Guy Feld’s invest under the premise that UK smaller companies tend to outperform their larger counterparts over the long term.
The duo aim to exploit the market information shortfalls and inefficiencies associated with small-cap analysis for their investments, an ethos somewhat proven by the long-term outperformance.
Since launch in 1995 it’s made a total return of 5147.8%.
Performance of fund vs index since launch
Source: FE Analytics
The team’s stock picking ability was a skill Dzmitry Lipski, head of funds research at interactive investor, said had been a main driver of this outperformance. The £1.6bn fund is currently split 44% in small caps and 35% in mid-caps.
Marlborough Special Situations has typically invested 80% of the portfolio in companies making up the bottom 10% of the market capitalisation, however this will change to a minimum of 60% in equities of companies with a market capitalisation of less than £2.5bn at the time of purchase.
The full list of funds with the highest total return over 25, 10, five and one is shown below.
Source: interactive investor (ii)
Next on the list was the Rights & Issues Investment Trust, returning 4,251.5% over 25 years. UK small-caps usually constitute 80% of the portfolio, which aims to outperform the FTSE All Share benchmark long-term. It doesn’t apply gearing and is running at a 7.2% discount with 0.52% ongoing charges.
The third-best performer over 25 years was the UK’s largest investment trust Scottish Mortgage. With £18.7bn in assets under management, managers James Anderson, FE fundinfo Alpha Manager Tom Slater and Lawrence Burns are not able to but the smallest companies, but instead look for strong, well-run businesses that offer the best potential and durable growth opportunities for the future.
Companies such as technology giants Tencent Holdings Tesla, Alibaba and Amazon all feature in the top ten holdings.
Lipski said that Scottish Mortgage was fast becoming a “household name” owing to its “stellar” medium and long-term performance.
He said that the managers strength in stock-picking skills combined with strong risk-adjusted performance and competitive fees made this a good choice for long-term investors.
“We view it as a good adventurous satellite holding for investors to gain exposure to exciting disruptive growth companies, both public and private,” Lipski said.
The trust holds an FE fundinfo Crown rating of five and made 2,930.2% over 25 years.
Scottish Mortgage is a serial outperformer in this study, also coming through as the second-best over 10 years (795.2%) and best over five years (383.3%).
Performance of trust vs sector and index over 20yrs
Source: FE Analytics
Baillie Gifford American and Morgan Stanley US Growth make up the trio of top performers over 10 and five years, as mid-term outperformance shifted into US growth and tech strategies.
The growth style of investing has benefitted from the ultra-low interest rate and loose monetary policies from the past decade, which have encouraged investors to take more risk.
Lipski said: “Scottish Mortgage and Baillie Gifford American have been a favourite among our customers, having tempted investors with their stellar returns over the medium and long term – largely powered by the outperformance of their tech holdings.”
He added that in the Baillie Gifford American fund the house’s stock selection and its focus on growth companies had tilted the portfolio towards “faster moving areas of the market” such as technology and healthcare.
The of low turnover, concentrated portfolio of 30-50 stocks invests where the managers see “exceptional growth businesses” that can harness the “asymmetry of returns inherent in equity markets”, whereby only a few stocks generate massive outperformance long-term.
Over 10 years it was the best performer, making 862.7% and over five years was second best, returning 367.2%.
It’s run by Gary Robinson, FE Fundinfo Alpha Manager Tom Slater, Kirsty Gibson and Dave Bujnowski and holds an FE fundinfo Five Crown rating.
Morgan Stanley US Growth was the third best over 10 and five years, making 769.4% and 314.1% respectively.
It has an FE fundinfo Crown Rating of Five and is run by a six strong management team; FE fundinfo Alpha Mager Dennis Lynch, David Cohen, Sam Chainani, Alexander Norton, Armistead Nash and Jason Yeung.
Coming to the near term performance and US, tech, growth gives way back to UK value and small-caps again.
Lipski commented that the UK has had a “long overdue reprieve” over the past year due to the Brexit clarity and positive economic forecast, which caused investors to flood the market with a “renewed sense of optimism”.
Topping the one-year performance was Chelverton UK Dividend Trust, with 103.2% total returns.
Managers David Horner and Oliver Knott have a “cast iron rule” that they will only invest in companies that will yield 4% over a year, meaning that every stock contributes to the overall yield of the fund. Currently the fund has a 4.3% dividend yield.
Once a business’ yield falls below 2% the managers typically divest and replace with “another high yielder”.
The trust currently has 30% gearing, operates on a 9.8% discount and has ongoing charges of 1.26%.
Since it launched in 1999 the trust has made a total return of 1025.6%.
Performance of trust vs index since launch
Source: FE Analytics
Aberforth Split Level Income made the second-highest returns for one year with a gain of 95.7%.
A value portfolio run by Jeremy Hall, Chris Watt, Keith Muir, Euan Macdonald, Sam Ford, Peter Shaw, Alistair Whyte its biggest holdings include Reach, Rathbone Brothers, Brewin Dolphin Holdings and Bloomsbury Publishing.
Third was Gervais Williams and Martin Turner’s Premier Miton UK Smaller Companies fund.
Investing in companies where the managers feel there are information gaps and have the potential for mispricing and great returns it has made a total return of 88.6% over one year.
The £166m fund is currently soft-closed following a large influx of investors this year replenishing the significant outflows it saw in 2020.