Shillito is a big fan of the fund and holds it in his own portfolio. He explains that MacKenzie follows a private equity-style approach when picking her investments, which differentiates her from the majority of her peers. Although the fund has not been one of the best performing small cap funds in terms of returns so far this year, Shillito says its improving performance since MacKenzie took over two years ago looks very promising.
He adds that it is a perfect holding for the long-term investor.
“My choice is the PFS Downing Active Management fund,” said Shillito, director of SG Wealth Management.
“I’m a huge fan of the fund, but if you look at the bare stats and its performance compared with others in the sector, it doesn’t appear to be that outstanding. It has only returned something like 30 per cent in a year – why people would be disappointed with that I don’t know – but the likes of Unicorn UK Smaller Companies are up more than 50 per cent.”
PFS Downing Active Management was launched in September 2008. The fund has underperformed since then, though Shillito says there were a number of complicated financial issues when the fund changed hands from Electra to Downing that have had a detrimental impact on long-term returns.
However, since Mackenzie was named lead manager in February 2011, the fund’s performance has improved considerably.
According to FE Analytics, PFS Downing Active Management has made 41.26 per cent since MacKenzie took over, double the returns of its composite benchmark – split 60/40 between the FTSE AIM All Share and FTSE Small Cap.
Performance of fund vs sector and index since Feb 2011
Source: FE Analytics
However, MacKenzie’s portfolio has underperformed against the IMA UK Smaller Companies sector over this time.
The fund has also underperformed against the sector over 12 months, as Shillito pointed out. Nevertheless, it has beaten its benchmark over the last year and has been top quartile for alpha generation relative to this measure.
Shillito rates MacKenzie because of her unusual way of building the portfolio.
“She approaches her investment style with a private equity mindset,” he said.
“Other funds, and I am by no-means knocking them, pick stocks that they think will do well. Judith, on the other hand, goes to the micro-cap market and looks in areas where others don't. She buys stocks from a private equity view point.”
“She will usually sit on the board and will inject debt just in case anything were to go wrong. She looks at her investments and wants to add something to the company, not just buy the stock,” Shillito added.
Shillito says that when MacKenzie buys a company, she looks for ones with a franchise or product that has got real potential. However, as a result, he says that investors in the fund need to be patient.
“I have to say, returns tend to come from a sale which means that they can be lumpy. Nevertheless, I think her performance has been remarkable considering that nobody knows about the fund. I don’t think it is fair to compare it to the small cap sector either, as she is in a world of her own,” he added.
MacKenzie isn’t afraid to take large positions, with the portfolio normally made up of just 25 to 30 holdings. The companies she invests in usually have a market cap ranging from £20m to £150m.
PFS Downing Active Management’s largest holding, for instance, is the FTSE AIM listed pawnbroker H&T Group. It has a market cap of just £53m and it makes up 9.25 per cent of the fund.
Inland Homes, which also sits on the FTSE AIM and has a sub-£100m market cap, is MacKenzie’s second largest holding, making up 8.54 per cent of her total assets. Inland Homes is a property development firm that specialises in buying and enhancing brownfield sites.
Small caps have had a very good run of late as investor risk appetite has increased. Our data shows that the FTSE Small Cap index has returned more than 30 per cent in 2013, which is nearly double the returns of the FTSE 100.
Performance of indices in 2013
Source: FE Analytics
Shillito says it is unlikely that small caps can continue with their stellar run. However, he says MacKenzie’s different investment approach means the PFS Downing Active Management fund should still perform well.
“My belief is that when the market eventually does turn against small caps, which it will inevitably after such a good run, she will continue to turn in the figures while other funds struggle,” he said.
“Because of her investment style and her private equity mindset, it doesn’t really matter what the market is doing. As a result, I think it is a great defensive play,” he added.
The PFS Downing Active Management fund requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 2.59 per cent.
