While the wider market struggled across most 2015 – the FTSE All Share was up just 0.98 per cent over the course of the year – the average smaller companies fund had a much stronger showing with a 14.86 per cent total return over the 12-month period.
The environment has changed considerably in 2016, however, after the victory of the Leave campaign in the referendum on the UK’s membership of the European Union damaged sentiment towards companies more exposed to the fortunes of the domestic economy.
Our data shows that the average member of the IA UK Smaller Companies sector was sitting on a 2.77 per cent loss for the first seven months of 2016 while the FTSE All Share is up 8.37 per cent – driven by the flow of investor cash into larger companies, which tend to have more international exposure.
Performance of sector vs index over 2016
Source: FE Analytics
A deeper look into the sector reveals that only nine of its 46 members – or 18 per cent of the peer group - have made money for their investors this year.
As point of comparison, 77 per cent of IA UK All Companies funds are in positive territory over this seven-month period as are 77 per cent of IA UK Equity Income funds.
The fund that has made the highest return over the year so far is James Zimmerman’s £62.5m Jupiter UK Smaller Companies fund with its 6.48 per cent total return. Its benchmark is up 1.58 per cent over the same time frame.
Source: FE Analytics
The fund has outperformed its average peer over three- and five-year periods as well but its performance since Zimmerman took over in June 2015 has been very strong; its 7.69 per cent return since then ranks it sixth in the peer group and is 9.61 per cent higher than the benchmark’s.
Zimmerman tends to invest in high-quality businesses and has his largest sector weighting to consumer services at 19.6 per cent, followed by technology and financials. His biggest individual holding is Somero Enterprises, followed by Fevertree Drinks and Ocado.
Performance of fund vs sector and index under Zimmerman
Source: FE Analytics
Of the nine funds on the list, two are held in high regard by FE ratings system as they have five FE Crowns, are headed by at least one FE Alpha Manager and appear on the FE Invest Approved List: Liontrust UK Smaller Companies and Marlborough UK Micro Cap Growth.
The £424.4m Liontrust UK Smaller Companies fund, which is headed up by Anthony Cross and Julian Fosh, has made a 1.83 per cent total return over the period in question, ranking it sixth in the peer group overall.
FE Alpha Manager duo Cross and Fosh put Liontrust’s Economic Advantage model at the heat of their investment process; this seeks out companies that have distinctive characteristics that competitors will find hard to replicate, such as intellectual property, strong distribution channels and recurring business.
The fund has a strong track record in protecting capital in difficult markets, which will have helped in the current conditions, as well as capitalising on any rallies.
FE Research said: “It is rare to find a fund that limits its losses to half those of its peers when markets fall, yet is still capable of leading the field when they rise again. This proves sticking to a sound investment process works and a selling discipline is as important as buying the right companies.”
Marlborough UK Micro Cap Growth – run by FE Alpha Manager Giles Hargreave and Guy Field – is placed third in the sector year to date after making 2.98 per cent. There's another two funds run by the manager on the list of smaller companies funds in positive territory.
Performance of funds vs sector over 2016
Source: FE Analytics
Given its micro-cap focus, the £526.6m fund has a bias towards more growth-focused parts of the market such as technology – which have the potential to lag in more risk-off times. However, Hargreave has a cautious approach to investing and controls risk by taking exposure to a large number of stocks (there are currently 264 holdings in the portfolio).
“This is a good way to access the extra growth potential of smaller companies without risking your cash in the ‘blue-sky’ companies, which can get a lot of attention but which never make a profit: the managers look for companies which are profitable or with a very clear path to profitability in the near future,” FE Research said.
A look at the other end of the table shows that Franklin UK Smaller Companies made the biggest loss over the first seven months of 2016 after falling 11.40 per cent. This comes after a top-decile 2015 when the fund was up 25.61 per cent.
It’s followed by JPM UK Smaller Companies (down 10.34 per cent), Aviva Investors UK Smaller Companies (down 8.14 per cent) and Kames UK Smaller Companies (down 7.98 per cent).