Boutique funds often get overlooked by those investors who focus on the more popular funds in a sector and those run by well-known fund managers.
For some, it can be time consuming to research and compare numerous performance tables, ratings and other data metrics, leading limit their search to household names with good long-term track records.
However, these funds are more likely to suffer from getting too big and see their investable universe shrink or be closed at some point, and leaves many smaller funds and managers off the radar for the majority of investors.
Therefore FE Trustnet asks industry experts which boutique funds with assets under management of less than £100m they hold and that investors should consider taking a closer look at.
This five crown-rated, £43m fund is the first name suggested by Saunderson House investment manager Ben Williams.
Run by Colin Morton, FE Alpha Manager Ben Russon and Mark Hall, the fund was launched in 1990 as Franklin UK Blue Chip but rebranded in January 2015 to reflect its focus on dividend growth companies across the whole UK equity market rather than purely FTSE 100 names.
“Morton believes that a UK equity portfolio constructed of high quality, cash rich, dividend paying companies has the potential to generate a long-term rising level of income and capital appreciation to outperform both the index and UK equity peers over the medium to long term,” Williams said.
“Rather than focusing on companies that may optically offer a high dividend yield that may come under pressure, Morton prefers to invest in companies that may offer a slightly lower headline yield but which have a proven track record of being able to increase their dividends, whilst retaining sufficient earnings to reinvest in their business for future growth.”
The fund currently yields 3.14 per cent and has a clean ongoing charges figure (OCF) of 0.55 per cent.
Since the rebrand in 2015, the fund has returned 29.34 per cent – ahead of both the FTSE All Share benchmark and IA UK All Companies sector over this period.
Performance of fund vs sector and benchmark since January 2015
Source: FE Analytics
“Since its rebrand the fund has outperformed the IA UK all Companies by 6 per cent yet remains sub £50m and off many fund analysts’ radars,” Williams said.
Also on Williams’ radar is the £25m TB Saracen UK Alpha fund, run by Craig Yeaman, though the portfolio struggled last year.
“2016 proved to be a difficult year for the fund, the first time it has underperformed its benchmark over a calendar year since 2011,” he said.
“With its high exposure to medium and smaller cap companies, and a low weighting to the overseas earnings of the largest FTSE 100 companies, the period immediately following the UK’s referendum was particularly painful.”
Indeed, over the last five years the fund has outperformed the IA UK All Companies sector and FTSE All Share, though last year it returned 5.47 per cent (11.28 percentage points lower than the All Share).
Performance of fund over 5yrs
Source: FE Analytics
“However, we believe now is a good time to be adding towards a concentrated, pure stock picking, index-agnostic portfolio,” Williams said.
“Long term performance remains exceptional – the fund is the fifth best fund in its sector since launch in 1999 – even despite a terrible 2008.”
The concentrated portfolio holds 29 stocks and is around 80 per cent weighted to UK mid- and small-caps, with just 20 per cent invested in large-caps.
The fund currently yields 1.9 per cent and has an OCF of 1.25 per cent.
Neil Shillito, fund manager at Downing LLP, suggests the $13.9m Montlake Tosca Micro-Cap UCITS fund run by Matthew Siebert, Daniel Cane and Jamie Taylor.
“Tosca is probably unknown in the wider market but has been known to Downing for some time because they are competitors in the sense that they research similar stocks,” he said.
“This fund is considerably smaller in size than we would normally consider, but our past experience has shown that provided that one’s due diligence is robust and the manager fits our three key criteria of being talented, disciplined and aligned, then the rewards have the potential to outweigh the risks.”
The fund runs a value-orientated strategy looking at the UK micro-cap section of the market and invests in companies with a market capitalisation of up to £250m.
Tosca Micro-Cap targets an annualised return in excess of 15 per cent (net of fees), according to its latest factsheet.
Since its launch in 2010 the fund, which has an OCF of 2.84 per cent, has returned 68.91 per cent, far ahead of its sector as the below graph shows.
Performance of fund vs sector since launch
Source: FE Analytics
The fund, which has 40 holdings, has a high weighting to technology as well as travel & leisure and healthcare stocks, with Immobile, Constellation Healthcare and Blue Prism Group among its top 10 holdings.
Heading into 2017, the fund managers said there are a number of macro headwinds, not least rising inflationary pressures on the UK consumer, “but with the 1000+ UK micro cap names <£250m market cap it gives us plenty of opportunities to navigate our way around these concerns”.
“Valuation in the core portfolio has moved higher but remains well below the broader UK market while offering faster growth and, we believe, better long-term returns.”
Finally, Rob Morgan, pensions and investment analyst at Charles Stanley Direct, suggests MI Downing UK Micro-cap Growth as a boutique fund investors should consider paying more attention to, though he warns that it would “likely close if it got too big”.
The five crown-rated smaller companies fund has been run by Judith MacKenzie since 2011 and has a “private equity style investment process revolves around helping management grow the business,” he said.
The £27.7m fund has returned 130.81 per cent over the last five years, making it a top quartile performer in the IA UK Smaller Companies sector.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund, which has been the second least volatile in the sector over the period, invests in a highly concentrated portfolio of 24 stocks.
MacKenzie focuses on capital preservation as well as growth and generally uses valuation as her jumping off point, focusing on stocks she believes are cheap.
It looks at companies with a market capitalisation of between £20m and £150m and is currently less than a quarter (24.3 per cent) invested in companies worth more than £150m.
The largest holdings in the portfolio include Redhall Group Amino Technologies and Pennant International, with the majority of the fund (46.67 per cent) invested in companies with less than a £50m market cap.
MI Downing UK Micro-cap Growth currently yields 0.43 per cent and has an OCF of 1.4 per cent.