Report: AIC UK Smaller Companies

A big range of returns reflects this investment diversity, given that the top performer’s reputable 9.9% is miles above the worst performer’s -65.7% loss, over the past year to October 2008. This notion is supported by the average fund posting an R-squared figure of 0.56 and a broad premium/discount range that spanned from a -53.3% discount to a premium of 30.7% between funds. It is nevertheless worth noting that the sector average discount was -14.9% as at September 2008.

When delving into asset allocation, one can see that funds at the top end of the performance scale were heavily weighted towards industrials and consumer services, whilst those on the opposite end of the spectrum were in oil & gas and mining.

Although annual volatility was unexpectedly lower over the year to September 2008, with the sector average reporting 18.6% against the FTSE 100’s (larger-cap) 20.3%, outliers can be seen at both ends of the scale, given that the most volatile fund was also the worst performer, Gresham House PLC (a dog), and the least volatile fund was also the top performer, Aberforth Geared Capital & Income (a star). Investors would have clearly preferred the one year combination offered by Aberforth – return of 9.9% for a 4.7% volatility – in comparison to that offered by Gresham House – loss of -65.7% with a volatility of 46.1%.

Outlook

Since the remit for funds operating within this sector is to invest in newly established and smaller companies that have more growth potential than their larger counterparts – it is fair to conclude that the current investment climate is not ideal.

Despite small-caps’ historical outperformance over large-caps, its clear to see a reverse in this trend over the past year, as 21 of the 24 funds in the sector underperformed the FTSE 100’s loss of 20.74%.

Because smaller companies maintain high betas to overall market direction, these funds tend to outperform in a bull market and underperform in a bear market.

As we appear to be embroiled in the latter, less enjoyable, of these two market conditions, one is directed to a grim outlook for high beta small-cap funds. Although stars can shine in this universe, the consensus is for NAV discounts to widen, and thus investors may be better placed to seek safer territory.

*Source of data: Financial Express Analytics