Our research shows that not only is the £587m fund the best performer over one, three, five and 10 years, but it also has one of the lowest annualised volatility scores over all periods.
Performance of fund, sector and benchmark over 10yrs
Source: FE Analytics
According to data from FE Analytics, Investec UK Smaller Companies has returned 422.51 per cent over 10 years, compared with 190.79 per cent from its sector average, and 242.35 per cent from its Numis Smaller Companies (ex IT) benchmark.
The fund is managed by Ken Hsia, but for most of the period in question it was headed up by FE Alpha Manager Philip Rodrigs, who moved to River & Mercantile to take over R&M UK Equity Smaller Companies in January of this year.
Hsia has been alternate manager of the fund during Rodrigs’ reign.
Given the fund’s stellar returns and low volatility, it is unsurprising that it has done very well from a risk-adjusted return point of view. FE data shows that it has a Sharpe ratio of 1.03 – the highest in the sector.
It just beats FE Alpha Manager Paul Marriage’s Cazenove UK Smaller Companies portfolio, which posts a Sharpe ratio of 0.97 over the 10-year period.
His fund has returned marginally more than the Investec one, with 392.94 per cent, but its high volatility drags its Sharpe ratio down.
Performance of fund, sector and benchmark over 10yrs
Source: FE Analytics
The Sharpe ratio measures a fund’s return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund's volatility.
Investec UK Smaller Companies isn’t the only top-performing UK small cap fund that also has a below-average volatility.
FE data shows that of the 10 best-performing vehicles over a 10-year period – which includes the likes of Harry Nimmo’s Standard Life UK Smaller Companies fund and Giles Hargreave’s Marlborough Special Situations fund – every single one has an annualised volatility lower than the Numis Smaller Companies (ex IT) index.
The below chart shows the total return and volatility of funds in the IMA UK Smaller Companies sector, and as you can see, some of the best performers have also been among the least volatile.
Risk/return of funds over 10yrs
Source: FE Analytics
Even over five years, during which time the small cap market has rallied by well over 100 per cent, nine of the 10 best performers over the period also have below-average volatility.
The likes of Investec UK Smaller Companies and Cazenove UK Smaller Companies are again in this elite group, and again they have operated with less volatility than the index.
Charles Hepworth (pictured), investment director at GAM, thinks the correlation between strong performance of funds and low annualised volatility may be partially due to the stockpicking abilities of managers and the particular differences between the funds’ sector and index.“Funds will hopefully avoid underperforming single-company names which in the index will inevitably lead to higher volatility,” he said.
“Portfolio construction may allow for volatility dampeners to be put on (derivatives and so on) which wouldn’t be in the index.”
“Active managers in this space can move to higher cash weights compared with an index which wouldn’t have cash, dampening volatility in market stress conditions.”
“The index will inevitably be broader and will include sectors and individual names that may on occasion show higher volatility than more narrowly focused funds.”
“There may be some evidence of single price-point divergence for funds, i.e. midday or morning pricing, enabling lower volatility numbers to show up compared with end of day index numbers.”
Darius McDermott, managing director of Chelsea Financial, says in most asset classes it is the managers who take on more risk that outperform during market rallies.
However, he points out that a lot of managers in this space have benefited from their overweight position in mid caps in recent years, which tend to be less volatile than small caps.
He adds that small caps are more susceptible to sharp falls and even defaults than larger companies, and thus finding quality companies with a focus on downside protection is crucially important.
Fidelity UK Smaller Companies is also worth a mention.
Although it doesn’t have a 10-year track record, it is another one that has consistently delivered table-topping returns with a lower volatility than the Numis index.
