The average UK Smaller Companies retail fund has an ongoing charges figure of 1.77 per cent according to FE Analytics, making it one of the most expensive sectors in the IMA universe. Both the IMA UK Equity Income and UK All Companies sectors have an OCF closer to 1.6 per cent.
There are, however, a handful of low-cost UK small cap funds which may be of interest to the thriftier investors among you. Here we take a look at three in detail.
Aviva UK Smaller Companies – OCF of 1.38%
With an OCF of 1.38 per cent, the £92m Aviva UK Smaller Companies fund is in the bottom decile for cost in its sector. The fund’s annual management charge (AMC) is just 1.25 per cent, and extra manager expenses have pushed the total cost of ownership up 13 basis points.
The fund, managed by Robin West and Toby Belsom, has consistently outperformed its FTSE Small Cap (ex IT) benchmark in recent years, with significantly less volatility.
Our data shows that the fund has returned 173.27 since the duo took over in May 2004, beating the index by almost 80 percentage points. It has also outperformed over three, five and 10 years.
Performance of fund, sector and index since May 2004
Source: FE Analytics
Over a five-year period the Aviva fund has an annualised volatility of 15.86 per cent, compared with 21.34 per cent from the small cap index.
It also has a far lower max drawdown and protected more effectively against the downside in 2008. West and Belsom have also beaten the average UK Smaller Companies fund over one, three and five years and since May 2004.
As the graph above shows, the bulk of this outperformance has come from the fund’s strong performance in the last three years or so; in the first three years, the fund struggled to keep up with its peer group.
Unlike many funds in the IMA UK Smaller Companies sector, Aviva is not heavily invested in mid caps, preferring to stick to companies with a market cap below £1bn.
The managers’ top-10 is littered with micro cap names, including the likes of LSL Property Services and St Modwen Properties.
Aviva UK Smaller Companies requires a minimum investment of £1,000 and is available across all major platforms. It is a top-10 holding for L&G Mixed Investment – a fund of funds with £478m in assets under management (AUM).
Baillie Gifford British Smaller Companies – OCF 1.5%
This four crown-rated fund targets "exciting young growth companies" through bottom-up analysis, searching for ones with strong earnings per share with a potential to increase cash-flows.
This strategy has worked very well: our data shows that Baillie Gifford British Smaller Companies has beaten its FTSE Small Cap (ex IT) benchmark over three, five and 10 years and delivered top-quartile returns in its sector over all three time frames.
Source: FE Analytics
Baillie Gifford British Smaller Companies has also been consistently less volatile than both the sector and index, again coping better in down periods.
The fund blossomed under manager Douglas Brodie between 2007 and 2013, but he recently quit his post in order to take up a position as manager of the Baillie Gifford Global Discovery fund.
His replacement, Andrew Strathdee, has worked on the UK small cap team for more than a decade, and previously managed the offshore NTMF UK Equity fund, which closed in 2007.
Strathdee invests in 50 to 80 companies and like all Baillie Gifford managers has a long-term focus and a low turnover. His fund has greater exposure to mid caps than its Aviva rivals, including well-established companies such as Rightmove, Asos and Abcam in its top-10.
Baillie Gifford British Smaller Companies requires a minimum investment of £1,000 and has ongoing charges of 1.5 per cent.
Marlborough Micro Cap Growth – 1.54%
FE Alpha Manager Giles Hargreave this year admitted that his Marlborough Special Situations fund may have to hold more in mid caps to counteract liquidity issues.
For anyone worried about this move, the manager’s Marlborough Micro Cap Growth fund – which has an even better record in recent years – is a worthwhile alternative.
The £220m portfolio has delivered top-quartile returns in its IMA UK Smaller Companies sector over three and five years and is second quartile over one. Only three funds have returned more over five years.
In spite of its micro cap focus, Marlborough UK Micro Cap Growth has only been marginally more volatile than its sector over these time periods.
Hargreave aims to minimise volatility by holding a huge number of companies – currently 224 – which eliminates single-stock risk. No single company has more than a 2 per cent weighting.
Risk/return of UK small cap funds over 5yrs
Source: FE Analytics
More than three quarters of the fund is invested in stocks with a capitalisation of less than £250m, with the rest between £250m and £1bn. Online payment company Optimal Payments and adviser company Utilitywise are the manager’s top-two holdings.
Rob Gleeson and his FE Research team rate Hargreave as one of the best small cap managers in the business, and include Micro Cap Growth in the FE Select 100.
"The fund is one of the best in terms of performance and quality of investment team," they said.
Marlborough UK Micro Cap Growth requires a minimum investment of £1,000 and has an OCF of 1.54 per cent.
