Schroder UK Smaller Companies, Marlborough Special Situations and Investec UK Smaller Companies are examples of IA UK Smaller Companies funds that have beaten the FTSE Small Cap (ex IT) index over the vast majority of five-year time frames – but one of their peers has been ahead of the index without fail.

Recent FE Trustnet research found that the IA UK Smaller Companies sector was the equity peer group with the most consistent track record of outperforming the index over rolling five-year periods.

Performance of sector vs index over rolling 5yr periods

Source: FE Analytics

As the chart above shows, the IA UK Smaller Companies sector has outpaced the index in the majority of the 51 five-year periods that span 1 January 2000 to 31 December 2004 through to 1 July 2012 to 30 June 2017 (when calculated on a quarterly basis).

Indeed, the peer group is ahead of the index in 78 per cent of these five-year periods, putting it in top place of the Investment Association’s main equity sectors. IA Europe Excluding UK (outperforming in 73 per cent of the periods) and IA UK Equity Income (ahead of the index 53 per cent of the time) come in second and third place respectively.

As FE Trustnet often points out, there is no such thing as the ‘average’ fund so in this article we find out which of the peer group’s members have the most consistent track records of five-year outperformance.

Baillie Gifford British Smaller Companies

Source: FE Analytics

Starting off the gallery is Baillie Gifford British Smaller Companies, which has outperformed the FTSE Small Cap (ex IT) index in 45 of the 51 five-year periods examined – or 88 per cent of the time. Over the entire period, its strongest run of relative performance saw it beat the index by 79.73 percentage points while the weakest was a 37.62 percentage point lag. The £194.6m fund has been managed by Andrew Strathdee since October 2013; prior to this it was run by Douglas Brodie, with Iain McCombie being in charge before him. Its portfolio is built around stocks with strong earnings per share and cashflow growth characteristics. Top holdings include fashion site Boohoo.com, life sciences firm Abcam and engineering company Renishaw. Baillie Gifford British Smaller Companies has a 0.68 per cent ongoing charges figure (OCF).

Investec UK Smaller Companies

Source: FE Analytics

Next up – after outperforming the index in 90 per cent of the five-year periods – was the £318m Investec UK Smaller Companies fund, which is managed by Ken Hsia and Calum Joglekar. However, they have only been at the portfolio’s helm for the past few years and prior to this it had been headed up by managers such as Philip Rodrigs and Daniel Hanbury. The fund has lagged the index in just five of the periods examined but it’s worth noting that these are the five most recent five-year periods. Its biggest outperformance of the index was by 134.49 percentage points (under Rodrigs); the most significant underperformance was by 40.83 percentage points. The fund is based on Investec’s quantitative ‘4-Factor’ process, which looks for above average quality companies with earnings upgrades but valuations that are below average. Security software and hardware company Sophos, recruitment firm Staffline and beverage group Fevertree Drinks are the biggest holdings. Investec UK Smaller Companies has a 0.83 per cent OCF.

Marlborough Special Situations

Source: FE Analytics

In third place is Marlborough Special Situations, which is headed up by FE Alpha Manager Giles Hargreave and Eustace Santa Barbara. This £1.4bn fund has outperformed the FTSE Small Cap (ex IT) index in 49 – or 96 per cent – of the 51 five-year periods examined. Hargreave has managed the portfolio since 1998 and established a strong track record of consistent outperformance, especially in challenging markets. The FE Invest team, which has the fund on its Approved List, said: “This is a good way to access smaller companies from a team who are very plugged into the market and very focused on handling the risks in this area. Risk management is taken very seriously and the managers show great discipline when they sell stocks that have been doing well and avoid becoming too invested in any positions, constantly asking whether they would buy their current holdings now or if there are better options out there.” The fund outperformed the index by 204.39 percentage points in its strongest period; it lagged by only 9.84 percentage points in its weakest. Marlborough Special Situations has an OCF of 0.80 per cent.

Schroder UK Smaller Companies

Source: FE Analytics

In second place in this research is FE Alpha Manager Andrew Brough’s £702m Schroder UK Smaller Companies fund, which has outperformed the index in 98 per cent of the periods – meaning it has only failed to beat it in one of the five-year timespans since the start of 2000. Its strongest period saw the fund beat the index by 50.14 percentage points while in the single period of underperformance it was only 84 basis points off drawing level with the FTSE Small Cap (ex IT) index. The fund’s process focuses on each company's ability to create value for shareholders, rather than try to predict what will happen in the wider economic environment. Its biggest holdings are Liontrust Asset Management, Photo-Me International and Dart Group. Schroder UK Smaller Companies has a 0.91 per cent OCF.

Liontrust UK Smaller Companies

Source: FE Analytics

Coming in first place after beating the FTSE Small Cap (ex IT) index in every one of the 51 five-year periods we looked at is Liontrust UK Smaller Companies. This £718.7m fund is managed by the FE Alpha Manager duo of Anthony Cross and Julian Fosh with Victoria Stevens and Matthew Tonge as co-managers. Holding five FE Crowns, the fund outperformed the index by 78.69 percentage points in its strongest period and was still ahead of it by 13.2 per cent in its weakest five-year run. It is managed using the Liontrust Economic Advantage process, which seeks out companies with intangible assets such as desirable intellectual property, strong distribution channels and significant recurring business. Its three biggest holdings are financial services group Brooks Macdonald, engineering company Renishaw and hospital IT business Craneware. Liontrust UK Smaller Companies has an OCF of 1.37 per cent.

Source: FE Analytics