Top-rated funds: UK Smaller Companies

Investing in smaller companies offers huge returns to those who can bear the volatility, although funds in this sector need a manager with significant expertise.

The IMA UK Smaller Companies sector boasts 18 Alpha Managers on the 56 constituent portfolios, meaning investors are spoilt for choice. 

Four of the funds in the sector with an FE Alpha Manager have five FE crowns, but none of them also appear on the AFI indices. 

Andy Parsons, who sits on the AFI panel and is head of research at The Share Centre, explains that for at least two of the three funds preferred by the panel, it is the longevity of the manager that makes the difference. 


Marlborough Special Situations

• FE Crown Fund Rating: Four 
• FE Alpha Manager rating
• AFI constituent: Aggressive, Balanced

"There are a great number of very talented managers in the sector, but what makes Giles Hargreave stand out is that he has gone through different cycles and is still producing strong returns," said Parsons.

"A manager who has been through crises should be able to handle different market conditions better." 

Data from FE Analytics shows that Marlborough Special Situations has made 477.76 per cent over the past decade; Hargreave has been at the helm for the whole period.

Performance of fund vs sector over 10-yrs



Source: FE Analytics

The fund has 259 holdings, a very high number, but Parsons says this is not necessarily due to a lack of conviction. 

"Because he [Hargreave] uses a team approach, he isn’t trying to personally analyse all the companies." 

The minimum initial investment is £1,000 and the total expense ratio (TER) is 1.54 per cent. 

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Cazenove UK Smaller Companies

• FE Crown Fund Rating: Five
• FE Alpha Manager rating 
• AFI constituent: none

Paul Marriage’s portfolio leads the sector over one-, three- and five-year periods, beating 51 funds over the longer time frame. 

Data from FE Analytics shows it has made 80.04 per cent over five years, despite the financial crisis of 2008, while the sector has returned just 28.01 per cent. 

Performance of fund vs sector and benchmark over 5yrs



Source: FE Analytics

Marriage took over the fund in January 2006 and was joined in September 2010 by John Warren. 

Parsons says that it is an excellent fund, but that Hargreave’s longevity adds further appeal to his portfolio. 

It is available with a minimum initial investment of £1,000 and has a TER of 1.6 per cent. 


Standard Life UK Smaller Companies

• FE Crown Fund Rating: Four
• FE Alpha Manager rating 
• AFI constituent: Aggressive, Balanced

Harry Nimmo is another manager with impressive longevity, having taken over this Standard Life fund in 1997. 

It has returned 330 per cent over the past decade and is a first-quartile performer over five- and three-year periods. 

"Bearing in mind this is a smaller companies fund, most people would expect a significant number of holdings, but this fund currently has only 55 which shows real manager conviction and belief in what he is choosing." 

"Harry runs on the basis of 'running your winners'," Parsons said, meaning that Nimmo continues to hold stocks even when the company grows to a size that far exceeds what would be considered normal for a small cap fund. 

The minimum initial investment is £500 and the TER is 1.69 per cent. 

Three other funds also have five FE Crowns and an FE Alpha Manager, but did not make it into the AFI portfolios. 

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The first is Hargreave’s Marlborough UK Micro Cap Growth fund, which focuses on much smaller companies with a market cap of less than £100m. 

Liontrust Special Situations, which FE Trustnet recently covered, also has both accolades, as does Schroder Institutional UK Smaller Companies.

The other fund on the AFI panel’s three portfolios is the Dimensional UK Smaller Companies fund, open only to institutional investors.