Funds investing in smaller companies have been struggling in the current economic environment, but considering average rolling returns instead of cumulative returns might help identify those vehicles that have been consistently better than others.
In this Trustnet series, we are highlighting Investment Association funds with the best rolling returns over the past decade. For the 120 months in the period we analysed, we collected funds’ quartile data relating to the previous three years of performance and calculated in percentage terms how frequently a fund was to be found in the first quartile of its peers.
This week, we look into the funds in the smaller companies sectors that scored a top-quartile performance for at least 60% of the time.
Monthly 10-yr rolling performance of funds vs sector
Source: FE Analytics
The UK conquered the first place in the list, with Liontrust UK Smaller Companies spending 84.2% of the time in the first quartile of its peers over the past 10 years, as the chart above suggests.
This strategy has a number of “compelling” attributes, according to Square Mile analysts, who praised the leadership of FE fundinfo Alpha Manager Anthony Cross as well as the “considered and well defined” investment process, which steers the fund towards “steady businesses with a competitive edge”.
“Given the fund's emphasis on smaller companies, steps have been taken to limit the fund's capacity, though we do not necessarily see this as a negative for it both protects existing investors and ensures the integrity of the approach,” they said.
“This fund may look markedly different from its benchmark and is also likely to have significant exposure to AIM [alternative investment market] listed companies. Although we note that an above average fee is applied, the fund's return profile net of all fees is exemplary.”
With an exclusive focus on AIM stocks, the other UK fund in the list was TM Stonehage Fleming AIM, a five FE fundinfo crown-rated fund, co-led by Alpha Manager Paul Mumford.
The £95m portfolio is invested in companies spread across any AIM sector and, occasionally, fully listed shares of companies with smaller market capitalisations.
Source: FinXL
North America came in second with the T. Rowe Price US Smaller Companies Equity fund. Led by Curt Organt, the $2.1bn vehicle follows an unconstrained strategy, which, compared to the Russell 2500 index, is mainly overweight IT, materials and industrials and underweight financials, consumer discretionary and communication services.
Moving over to Japan, Baillie Gifford Japanese Smaller Companies is run by “articulate, highly competent and experienced managers” with a “robust” investment process, according to Square Mile analysts, making it an “aptly suited [strategy] to the task of identifying fast growing and quality companies which are disrupting traditional business practices in an extensive investible universe”.
“This fund has struggled to consistently meet its performance objective, but we still believe that it has the ability to deliver outperformance of its benchmark over the longer term,” they said.
The fund was also recently highlighted by Darius McDermott, managing director of Chelsea Financial Services, in this Trustnet feature.
Finally, at a sizable distance from the podium, the wooden spoon goes to IA European Smaller Companies. The best in the sector was Janus Henderson European Smaller Companies, which achieved a first-quartile performance in 65% of the 120 rolling periods.
This four FE fundinfo Crown-rated fund differentiates itself from most of the small-cap European fund managers as it does not invest in quality-growth business, but instead follows a business cycle approach and a strict valuation discipline, FE Investments analysts explained.
“The fund manages to achieve a consistent balance of value and growth stocks and holds up well in every market environment, delivering consistent performance across time,” they said.
“Investing in companies with a market cap lower than €1.5bn, the final portfolio is tilted towards the lower end of the small-cap spectrum. Long-term relative performance has been strong thanks to a combination of superior stock selection and a strict sell discipline.”