The most consistent funds of the decade: IA UK Smaller Companies

Liontrust UK Smaller Companies has been the most consistent IA UK Smaller Companies fund of the past decade, beating the most common benchmark in the sector – the Numis Smaller Companies ex ITs index – as well as its average peer in nine of the past 10 calendar years, Trustnet has found.

Of the 43 funds with a track record long enough to be included in the study, another two funds – Fidelity UK Smaller Companies and Janus Henderson UK Smaller Companies – also beat the index in the same number of years. However, they only beat their average peer in seven of the past 10 calendar years.

Performance of funds vs sector and index

Source: FE Analytics

Another six funds beat the Numis index in eight of the past 10 calendar years.

Liontrust UK Smaller Companies is headed up by Anthony Cross, Julian Fosh, Victoria Stevens, Matt Tonge and Alex Wedge, who use the ‘Economic Advantage’ investment process.

This aims to identify intangible assets that act as barriers to entry, allowing companies to defy industry competition and sustain a higher-than-average level of profitability for longer than expected.

The managers look for three intangible assets in particular: intellectual property, strong distribution channels and significant recurring business. In addition, senior management must own at least 3% of a company for it to merit inclusion in the fund.

The team at Square Mile Investment Consulting & Research said Liontrust UK Smaller Companies benefits from numerous “compelling attributes”.

“The investment process applied is considered, well defined and steers the fund’s management team towards relatively steady businesses that it believes have a competitive edge and are gradually growing and generating high levels of cash,” they said.

However, it warned the fund will behave differently from its benchmark and is likely to have significant exposure to AIM stocks.

“Given the fund's emphasis on smaller companies, steps have been taken to limit capacity, though we do not necessarily see this as a negative, for it both protects existing investors and ensures the integrity of the approach,” Square Mile said.

“Although we note that an above-average fee is applied, the fund’s return profile net of all fees is exemplary.”

Liontrust UK Smaller Companies has made 475.6% over the 10-year period in question, the second-highest figure in the sector.

Fidelity UK Smaller Companies is managed by Jonathan Winton, who searches for companies that have gone through a period of underperformance, but where there are signs of positive change.

Winton said the stock market tends to be inefficient at pricing companies that have gone through a troubled period and are consequently out of favour. This is particularly the case for small caps, where a lack of research can combine with market scepticism to leave many companies trading below their true value.

“Our investment process places strong emphasis on understanding the downside risk of each potential investment,” said the manager.

“Chosen investments exhibit an asymmetric risk-return profile, where the potential for future upside in the price of a stock far exceeds the prospect for further declines.”

Data from FE Analytics shows Fidelity UK Smaller Companies made 399.5% over the past 10 years, the seventh-highest figure in the sector.

Performance of funds vs sector and index over 10yrs

Source: FE Analytics

Winton has worked on Fidelity UK Smaller Companies since 2013 and became lead manager in April 2014. 

Janus Henderson UK Smaller Companies is headed up by Neil Hermon, who takes a long-term view on companies, with a process grounded in a strong valuation discipline. He gradually reduces and ranks the universe of potential holdings through broad-based screening, meeting with management teams, analysing financial data and building company profiles. The manager normally avoids micro caps due to the difficulty involved with buying and selling shares in these companies.

The fund has made 351.6% over the 10-year period in question, the 11th-highest figure in the sector.

In a recent note to investors, Hermon sounded an optimistic note, saying that despite the havoc caused by the coronavirus, businesses were in a much better position than they were during the financial crisis.

“Balance sheets in particular are more robust,” he said. “Most companies are beating their initial post-Covid earnings and cash expectations.

“The movements in equity markets have thrown up some fantastic buying opportunities and we expect many listed companies to emerge stronger from the downturn. However, it is important to be selective, as any recovery will be uneven and the strength of franchise, market positioning and balance sheet will determine the winners from the losers in a post-pandemic world.”