MFM Bowland, Unicorn UK Growth and F&C UK Mid Cap are among some of the smallest and highest-returning funds with the best alpha generation within the IA UK All Companies sector, according to data from FE Analytics.
As has been noted in several FE Trustnet articles, the draw of ‘star managers’ and the immense popularity of a small selection of funds in each sector can often mean more nimble vehicles are overlooked.
In an article published last week, in fact, Psigma Investment Management’s Tom Becket warned that this trend could be set to intensify over coming years.
“We already live in a world where fund selectors are reticent to seed new funds or back smaller funds and an exacerbation of this trend will be that new entrants will find it even harder to raise money and make their businesses a success,” he said.
However, many smaller funds have the ability to invest in stocks across the entire market cap spectrum because, after all, a 3 per cent weighting in a £3bn fund mean the manager holds a much larger percentage of a small-cap business than a 3 per cent weighting in a £300m fund.
As such, FE Trustnet decided to look at the smaller, nimbler funds which are plugging away under the radar and generating significant alpha while remaining in the shadows of their larger peers.
Out of the 208 actively-managed IA UK All Companies funds with five-year track records, only six are in the bottom 25 per cent for their fund size, the top 25 per cent for their alpha generation relative to the FTSE All Share and the top 25 per cent for their total returns over this time frame.
Source: FE Analytics
The smallest of these is MFM Bowland, which is just £14.5m in size and is one of two funds on the final list to boast a top-quartile maximum drawdown over the same time frame.
The fund aims to provide capital growth through companies spanning the market cap spectrum. The manager – Leon Shaull from Hargreave Hale – focuses on operating history, balance sheet health and excess cash generation when choosing individual holdings.
As of the end of March (which is the latest information available) the five crown-rated fund’s largest individual weightings included the likes of Unilever, chemicals company Treatt and Dechra Pharmaceuticals.
While the fund has indeed performed well over five years – having returned 124.63 per cent and achieved an alpha generation (which measures a fund’s over- or underperformance in relation to a benchmark) of 11.84, it is not widely marketed for retail investors and is only available on a handful of retail and institutional platforms.
The next fund on the list with an AUM of £27.1m is Unicorn UK Growth, which has been headed up by FE Alpha Manager Fraser MacKersie since 2011.
The fund aims to provide long-term growth through a relatively concentrated portfolio of 48 stocks, most of which reside further down the cap spectrum or are AIM-listed. For instance, its largest individual weightings include identity management firm GB Group, consulting services provider First Derivatives and concrete levelling company Somero.
The fund has an alpha generation figure of 12.4 and, over five years, has outperformed its average peer and the FTSE All Share by 60.4 and 52.34 percentage points respectively with a total return of 130.31 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, investors should note that the fund has a bottom-quartile maximum drawdown of 16.35 per cent thanks to a difficult 2014, when it ended the year down 8.08 per cent while the FTSE All Share returned 1.18 per cent.
Unicorn UK Growth has a clean ongoing charges figure (OCF) of 0.99 per cent.
An even-higher octane fund to have made it onto the list for its maximum drawdown of 23.45 per cent is Standard Life Investments UK Equity Recovery.
The £38.4m fund has a value bias – which may well have contributed to its fluctuations in performance – as well as a concentrated portfolio of 44 holdings.
While it struggled in 2014 and 2015 having lost money during both years, the fund has nevertheless comfortably outperformed the FTSE All Share and its sector average with a total return of 157.59 per cent, suggesting those with a strong-enough stomach will have been well-rewarded for their patience.
The fund has an alpha generation figure of 8.12 and will primarily look for company turnaround stories amid large and medium-sized UK companies. Investors should however note that manager Andrew Hunt has only been at its helm since March 2017, having taken over from David Cumming.
SLI UK Equity Recovery has a clean OCF of 1.03 per cent.
Thomas Wilson’s F&C UK Mid Cap fund is at the opposite end of the spectrum, having achieved a top-quartile maximum drawdown of 8.39 per cent as well as alpha generation of 10.09 and a five-year total return of 133.16 per cent.
However, investors should note there is a greater likelihood that mid-cap focused funds will achieve a higher alpha generation than their peers relative to the FTSE All Share, as its investment pool will differ significantly.
Compared to its FTSE 250 ex IT benchmark, the fund still boasts positive alpha generation of 2.65.
The four crown-rated fund is £32.9m in size and has a relatively concentrated portfolio of around 40 stocks, with its top 10 largest holdings accounting for 43.3 per cent of the overall fund. These stocks are chosen purely through a bottom-up process which focuses on strong competitive positions and capable management.
F&C UK Mid Cap has a clean OCF of 0.81 per cent.
The second fund on the list to adopt the FTSE 250 as its benchmark is Allianz UK Mid Cap, which has AUM of £49.31m and has returned 106.16 per cent over five years.
The four crown-rated fund has a five-year alpha generation relative to the FTSE All Share of 6.68. Relative to its benchmark, however, it has a negative alpha generation of 0.33, having underperformed the FTSE 250 ex IT by 3.15 percentage points despite beating the All Share by 36.25 percentage points. In relation to its sector average, it has a second-quartile maximum drawdown of 10.28 per cent over five years.
The fund is co-managed by Andrew Neville and Matthew Hall. It has a markedly concentrated portfolio of 27 holdings which are chosen using a bottom-up stock selection process. Its largest individual constituents include the likes of Auto Trader, Tullow Oil and plastic packing supplier RPC Group.
Allianz UK Mid Cap has a clean OCF of 0.84 per cent.
The final fund on the list is FE Alpha Manager Mark Slater’s MFM Slater Recovery, which has an AUM of £39m, a five-year alpha generation of 11.4 relative to the FTSE All Share and a five-year total return of 115.28 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Slater adopts a multi-cap approach to bottom-up stock selection and many of his largest holdings – such as First Derivatives, Restore Plc and Next Fifteen Group – are constituents of the FTSE AIM index.
The manager is also unafraid to utilise his overseas exposure allowance and holds Hong Kong pharmaceutical company Hutchison China Meditech and Israeli media company Taptica International.
Investors should note that the fund has a bottom-quartile maximum drawdown over five years of 17.76 per cent, which suggests it may not be suitable those who are more cautious.
The four crown-rated fund has a clean OCF of 0.82 per cent.