There are just three funds in the IA UK Smaller Companies sector with a Crown Rating of four or above and a low correlation to at least one highly rated peer.
The small-cap sector is a high-growth area of the market where active managers can really add value. However, there is a high correlation between many of the best performers.
Correlation of top-rated funds
Source: FE Analytics
Just one fund in the sector – Premier Miton UK Smaller Companies – had a Crown Rating of at least four and a correlation of 0.7 (where 1 = a perfect correlation and 0 = no correlation) or less with more than one of its highly rated peers.
Premier Miton UK Smaller Companies
Premier Miton UK Smaller Companies, managed by Gervais Williams and Martin Turner, struggled in the years running up to 2020’s pandemic, but benefited from a put option on the FTSE 100 as the market fell last March. It then used the profits from this bet to pick up shares at distressed levels, helping it to become the best performer in its sector last year, with gains of 77.3%.
It was aided by its exposure to commodities, which offered strong gains in the recovery – basic materials made up one-third of the fund as at the end of July. This also helps to explain its low correlation to the other two funds on the list – the sector makes up less than 5% of their assets.
At the start of the year, Williams said his value style should continue to stand him in good stead, telling Trustnet: “What’s amazing, and this is probably the most attractive moment in my entire career, is the valuation dichotomy between a lot of the long-duration technology-led ‘potential’ companies and the current cash-generative grubby things like mining companies and slightly difficult-to-understand financials. I’ve never known such a disparity between those two.
“Currently, you can buy companies on price-to-earnings (P/E) ratios of five or four with immediate cash paybacks of sensational returns. It is quite honestly astonishing. The risk/reward ratio is sensational.”
Data from FE Analytics shows Premier Miton UK Smaller Companies has made 322.6% since launch in December 2012, compared with 224.2% from the IA UK Smaller Companies sector and 185.8% from its FTSE Small Cap ex ITs benchmark.
Performance of fund vs sector and index since launch
Source: FE Analytics
This fund has soft-closed to new money. However, retail investors can still access it without paying an entry charge through platforms.
Jupiter UK Smaller Companies Focus
Jupiter UK Smaller Companies Focus is run by David Cameron-Mowat, who aims to outperform in all stages of the economic cycle by investing in businesses that will do well in the current environment.
To achieve this, he looks at a company’s business model, strategy and finances, looking for above-average growth and profitability potential. This is combined with analysis of the wider macroeconomic environment, which guides his sector exposure.
The manager is currently using a barbell strategy split between structural growth names and domestic cyclicals, which are expected to benefit from a reopening economy.
Cameron-Mowat is a recent appointment, taking over from Nick Williamson who managed the fund since the start of 2016. FE Investments said that although Williamson’s departure came as a loss, “the team has demonstrated a good history of manager succession and as such we retain conviction in the fund”.
Data from FE Analytics shows Jupiter UK Smaller Companies Focus has made 476.7% over the past 10 years, compared with gains of 278.1% from the sector and 205.9% from its Numis Smaller Companies ex ITs benchmark.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
Royal London UK Smaller Companies
Henry Lowson, lead manager of the Royal London UK Smaller Companies fund, looks for small caps that he believes can increase their profits and cash sustainably and faster than the market, giving them the potential to eventually become large caps.
He takes a quantitative and qualitative approach to company analysis, with an emphasis on meeting management teams. He also combines a structural view of an industry in which a company operates with analysis of fundamentals such as balance sheet strength and net debt.
“One of the core pillars of our investment process is to invest in companies that benefit from secular revenue growth opportunities; that is, they are exposed to long-term thematics and end markets that will sustain their growth through a normal economic cycle, or because a company’s attributes allow them to sustainably gain market share,” he said in the fund’s interim report.
“The extraordinary events of 2020 added fuel to the fire in the case of supply chain security and digital transformation.”
Data from FE Analytics shows the fund has made 333.9% over the past decade.
Fund information
| Name | Fund size (£m) | OCF (%) |
|---|---|---|
| Jupiter UK Smaller Companies Focus | 396.2 | 0.86 |
| Premier Miton UK Smaller Companies | 149.6 | 0.91 |
| Royal London UK Smaller Companies | 453.7 | 0.77 |