Investors should stay put over the short term if they already hold Schroder UK Dynamic Smaller Companies in their portfolios, several investment professionals have recommended, although some believe it should be taken as an opportunity to consider the fund’s performance relative to its peers. 
It follows yesterday’s announcement that FE Alpha Manager duo Paul Marriage (pictured) and John Warren will leave Schroders at the end of the year to start their own company, Tellworth Investments.
Their firm is set to become the first boutique partner of asset management incubator BennBridge and, once finalised, will continue running both the Ucits and non-Ucits versions of their £380m UK Dynamic Absolute Return Strategies fund.
While the investment process of these funds is set to remain the same, the future of their £604m UK Dynamic Smaller Companies fund is less clear and will remain with Schroders.
The fund has been a firm favourite among investors over the years, with the portfolio comfortably doubling the returns of its sector average and benchmark since Marriage took to its helm in 2006 (he was joined by Warren in 2010).
Performance of fund vs sector and benchmark under Marriage
Source: FE Analytics
Richard Philbin, chief investment officer at Wellian Investment Solutions, said that because Marriage and Warren aren’t leaving until the end of the year, they will do their best to maintain their long-term performance track record.
“Even though the new opportunity is very exciting, they are going to enter a new phase of their careers without the resource of Schroders, so they will not want to lose any existing clients as these are likely to be the first people they approach when they have their feet under the desk at Tellworth,” he said.
“Being as they will be at Schroders for some time this will allow existing unit holders to consider their next moves accordingly. Remember, this has probably been in the offing for many months and Paul and John are seasoned professionals – just because the news broke [yesterday], the odds are there has been a great deal of work going on in the background for quite some time.”
While Philbin said the fund’s investment process may change because the managers will not have the resources of Schroders around them, they must be confident they can deliver in the future otherwise they would not have taken this course of action.
“Also, Schroders have given them a vote of confidence as they are taking assets with them and will be represented on the GAIA platform,” the chief investment officer added.
Darius McDermott, managing director of Chelsea Financial Services, has downgraded the Schroder UK Dynamic Smaller Companies fund to a ‘hold’ from a ‘buy’.
While he believes the process is being handled well by both the managers and Schroders itself, he said the fact Marriage and Warren will no longer look after the fund may come as a blow to investors.
"Given that long period of stability, investors will now be looking for reassurance that the fund's strategy, which has significantly outperformed both its benchmark and its peers under Paul and John's tenure, will continue with minimal interruption,” he explained.
"Schroders has an impressive pool of talent across its European and UK equities business, and strong analyst support teams who will hopefully help ensure some level of continuity for investors. We look forward to learning of the new fund manager promptly.”
Hargreaves Lansdown has also removed the fund from its Wealth 150+ list for the time being in anticipation of further details.
Mark Dampier, head of research at the firm, said: “These managers have added exceptional value for investors over the longer term through good stock selection, particularly among the UK’s higher-risk smaller companies.
“Great managers moving on to set up their own boutique firms is nothing new, with Neil Woodford being one of the more recent and high profile. This is why it is important to follow the track record of the manager and not the fund.
“Removing the fund from the Wealth 150+ is precautionary – it is still a great fund run by the same excellent team for the next few months so there is no need for investors to make quick decisions.”
Jason Hollands, managing director of Tilney Group, said it is a case of ‘wait and see’ in terms of who Schroders employ as a replacement manager.
“While I would suggest investors stay put and await more information on the new managers from Schroders, for those itching to move another fund with a focus on the smallest stocks an alternative would be Marlborough UK Micro Cap Growth,” he said.
“But, there are also some similarities in approach, namely a preference for businesses with intellectual property, to be found with the Liontrust Special Situations fund.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Adrian Lowcock, investment director at Architas, agrees with Hollands that the best course of action is to initially do nothing, as the process of a fund manager deciding to leave and the announcement to leave can take time.
“In one respect any disruption caused will have already had an impact on the portfolios, but you should take this as an opportunity to consider the fund’s performance and look at that of their peers,” he said. “It may be that a better fund clearly stands out and therefore a switch would be appropriate.”
One smaller companies fund Architas particularly likes is Franklin UK Smaller Companies, which is headed up by Richard Bullas and FE Alpha Manager Paul Spencer.
“The managers are willing to take a contrarian stance when market mispricing creates outstanding investment opportunities,” Lowcock explained. “While economic and industry drivers are important considerations, the fund is built from the bottom up, with each stock included in the portfolio on its own merit.”
When it comes to Schroder UK Dynamic Smaller Companies, Lowcock said its objectives are unlikely to change. However, he pointed out the process of how to achieve its objective will always change from one manager to another as personal styles and bias drive the process.
“Schroders are unlikely to appoint a manager with a significantly different style as the fund has been a strong performer over Paul Marriage’s tenure,” he said. “However, he does have a distinctive style in the smaller companies fund he follows the P3M philosophy looking at Product, Market, Margin and Management.”
Ryan Hughes, head of fund selection at AJ Bell, said the move will create uncertainty for investors who now need to decide what the right course of action will be. Given that there has been no announcement regarding the successor, he said the future is unclear and that Schroders needs to give investors clarity as soon as possible so they can make the appropriate decision.
“Until there is a new manager announced, it is impossible to say what will happen. However, smaller companies managers often have their own investment process and therefore it is entirely possible that there will be changes to the way the fund is managed,” he said.
“For investors looking at smaller companies alternatives, I would look at the Old Mutual UK Smaller Companies fund or the River & Mercantile UK Equity Smaller Companies fund, with both having experienced fund managers and strong track records.”
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Ben Yearsley, director of Shore Financial Planning, said: “Smaller company investors may wish to see if Marriage and Warren set up a new long-only, small-cap fund at the new company before making any decision about switching.
“Otherwise there are plenty of good alternatives such as Old Mutual UK Smaller Companies or Marlborough Micro Cap.”