Standard Life UK Smaller Companies, Throgmorton and Aberforth Smaller Companies are among some of the trusts best-suited to investing in UK equities further down the cap spectrum, according to Kepler Trust Intelligence’s Alex Paget (pictured). 
The research analyst told FE Trustnet in an article published last week that open-ended UK small-cap funds could face “very challenging times ahead” given due to liquidity concerns and potential for their portfolios to drastically alter as their assets under management increase.
As such, he said the closed-ended vehicle structure is far better suited to gain exposure to this area of the market, particularly given the levels of uncertainty caused by ongoing Brexit negotiations.
“Just like in the closed-ended space, we believe many open-ended funds are run by high-quality managers who have delivered significant outperformance to boot,” Paget said.
“However, one of our core beliefs is that the closed-ended structure is far better suited to certain areas of the market and in particular UK small-caps where, in our view, it helps investors mitigate unforeseeable (but usually liquidity-related) risks.”
In the below article, the research analyst lists five trusts in the IT UK Smaller Companies sector that he believes will stand investors in good stead over the long term.
Standard Life UK Smaller Companies
Headed up by FE Alpha Manager Harry Nimmo since 2003, Standard Life UK Smaller Companies has £335.6m of assets under management and is trading on a 5.4 per cent discount.
Over the last decade, it has outperformed its average peer and Numis Smaller Companies ex IT benchmark by 136.96 and 164.17 percentage points respectively with a total return of 289.81 per cent. It is also worth noting that, during 2008, it lost only half that of its sector average and finished the year down 20.89 per cent.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
In terms of its risk metrics generally, it is in the top decile for its maximum drawdown (which measures the most money lost when bought and sold at the worst times), Sharpe ratio (which measures risk-adjusted returns) and annualised volatility over the last 10 years.
Nimmo invests in a combination of Numis Smaller Companies ex IT-listed stocks, FTSE AIM-listed stocks and holds a small proportion of the portfolio is in FTSE 250 constituents. Examples of the largest individual weightings in the portfolio include Fever Tree, healthcare chain and distribution business NMC Health and JD Sports.
Its 20 largest holdings account for 56.9 per cent of the overall portfolio which, relative to its benchmark, has an active share of 87.9 per cent.
Standard Life UK Smaller Companies is 2 per cent geared, yields 1.5 per cent and has an ongoing charge of 1.13 per cent.
Next on the list is BlackRock’s Throgmorton trust, which has been managed by Mike Prentis and Richard Plackett since 2008. The managers were then joined by Dan Whitestone and Lucy Marmion in 2015.
The £477m trust is currently trading on a hefty 16 per cent discount, although this has narrowed slightly from its average one-year discount of 18.19 per cent. This is despite the fact it has comfortably outperformed its average peer and benchmark with a top-quartile return over this time frame.
In fact, the trust has outperformed its sector average over one, three, five and 10 years. Over the last decade, it has returned 186.63 per cent compared to its average peer’s return of 153.06 per cent and its Numis Smaller Companies + AIM ex IT benchmark’s return of 74.79 per cent. However, it has a higher annualised volatility and a maximum drawdown of 67.58 per cent compared to its sector average’s drawdown of 52.69 per cent over this time frame.
This can be attributed to challenging periods in 2007, 2008, 2011 and 2014 when it made significantly greater losses than its average peer.
The managers invest in both small and mid-cap stocks, with veterinary services company CVS, JD Sports and 4imprint Group accounting for the trust’s largest individual weightings.
Throgmorton is 27 per cent geared, yields 1.7 per cent and has ongoing charges including a performance fee of 1.34 per cent.
Paget also said Aberforth Smaller Companies is a good option for investors looking to gain exposure to UK small-caps.
The £1.4bn trust aims to provide growth through a value investment process, which the team defines as buying companies which are below their intrinsic value. It does this through a combination of bottom-up stockpicking as well as industrial-wide sector analysis. Examples of its largest holdings include metal flow engineering company Vesuvius, bus and rail operator FirstGroup and van rental firm Northgate.
Alistair Whyte and Richard Newbery launched the trust at the tail end of 1990 and were joined by co-managers Andrew Bamford and Euan Macdonald in 2001. The latest recruit to the management team is Keith Muir, who joined its helm in 2011.
While the trust has outperformed its average peer over five years, it has returned less than half that of its sector average over three years, which could account for its hefty 12.4 per cent discount.
Its underperformance over this time frame can be attributed to a return of 13.86 per cent while its sector average returned 25.3 per cent, and a loss in 2016 of 4.24 per cent compared to its average peer’s return of 3.98 per cent. This is perhaps not surprising, given its style was hugely out of favour over these periods.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Another expectation when it comes to value investment vehicles – particularly those that invest in smaller companies – is that they may experience greater volatility. Over 10 years, it has a higher annualised volatility than its benchmark and average peer, as well as a maximum drawdown of 56.02 per cent.
Aberforth Smaller Companies yields 2.1 per cent and has an ongoing charge of 0.8 per cent.
Invesco Perpetual UK Smaller Companies
This five crown-rated trust has been headed up by Jonathan Brown and Richard Smith since 2002.
It aims to provide long-term growth through investing in both small and medium-sized companies which boast strong balance sheets and self-help capabilities without relying on the wider economy to stimulate growth. Its largest holdings include the likes of JD Sports Fashion, CVS and Dechra Pharmaceuticals.
The trust has achieved top-quartile returns over three, five and 10 years and, over the last decade, it has outperformed its sector average and benchmark by 62.06 and 89.16 percentage points respectively with a total return of 214.59 per cent. It also has a top-decile maximum drawdown of 53.05 per cent over this time frame, as well as a top-decile Sharpe ratio and second-decile annualised volatility.
This could be due to the diversification level of the trust, as its top 10 largest holdings account for 25 per cent of the overall portfolio.
In their latest factsheet, the managers said they aim to retain a degree of caution given the continued economic and political uncertainty.
“Through this time, we believe that there are resilient companies able to sustainably generate profitable growth in excess of the wider economy through market share gains, exposure to higher growth niches and re-investment of cash flows,” they said.
Invesco Perpetual UK Smaller Companies is trading on a 5.9 per cent discount, yields 3.6 per cent and has an ongoing charge including a performance fee of 1.27 per cent.
River & Mercantile UK Micro Cap
Despite only being launched in December 2014, Paget likes this trust because of its newly-launched feature to limit any capacity constraints.
Because the trust’s NAV is capped at £100m, any excess will be sold off proportionately and returned to shareholders in the form of capital appreciation.
Not only does this ensure the trust remains nimble enough to invest in micro-caps, it also means the discount is likely to remain narrow as holders allows the excess capital to be invested back into the trust. For instance, it is currently trading on a 2.4 per cent discount compared to its average peer’s discount of 11.1 per cent.
Since its launch, the trust has returned 67 per cent compared to its average peer’s return of 55.8 per cent. It has done so with a top-quartile maximum drawdown, Sharpe ratio and annualised volatility.
Performance of trust vs sector since launch
Source: FE Analytics
River & Mercantile UK Micro Cap has an ongoing charge including a performance fee of 2.38 per cent.