As FE Trustnet highlighted this morning, the consensual view that large-caps offer the safest equity exposure is starting to be challenged. 
According to our latest poll in which more than 1,200 of you participated, only 30 per cent now think large-caps are the safest area of the UK equity market while 70 per cent say either small or mid-caps will offer the least risky ride.
Of course, most FTSE 100 stocks haven’t coated themselves in glory of late thanks to macroeconomic headwinds rocking the largely international-facing index and the fact that many have extremely challenged dividends.
On the other hand, though, while mid and small-caps have been boosted by an improving UK economy and a business-friendly government, many of them are now quite richly valued as a result and many warn the uncertainty surrounding a potential ‘Brexit’ could harm their share prices.
It must also be noted that larger companies have tended to post lower drawdowns than small and mid-caps over the longer term.
Indices total returns and maximum drawdown over 10yrs
Source: FE Analytics
Nevertheless, all of the industry commentators we spoke to said the question of which area of the UK is the safest at the moment was an extremely difficult one to answer given the uncertain outlook for the UK equity market as a whole.
As a result, many of them say investors can bypass the issue by picking a genuine multi-cap manager who can make the market-cap allocation decision for them.
Therefore, in this article, we look at three they think offer the best opportunities for investors.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, is one who thinks market-cap allocations are difficult to call at the moment and therefore recommends the £1.6bn Liontrust Special Situations fund, which holds 35.7 per cent in the FTSE 100, 33.8 per cent in the FTSE 25 and 20.7 per cent FTSE Small Cap and AIM-listed stocks.
“There has been something of a perfect storm for the FTSE 100 - energy and mining exposure, fears of dividend cuts and the worries about the lack of global growth affecting the banks,” Morgan said.
“I still think large caps do represent the safest taken in aggregate, but really it’s more a question of the type of business, the sector it’s in and the state of its balance sheet than size.”
“The solution to my mind is going for an all-cap fund that backs quality businesses – Liontrust Special Situations for instance. Though depending on your timing these may be invested in more expensive parts of the market. Safety comes at a price.”
Liontrust Special Situations, which is co-run by FE Alpha Managers Anthony Cross and Julian Fosh, was launched in November 2011 and invests in high quality companies that the managers believe have an ‘economic advantage’.
This means focusing on companies the duo thinks have intangible strengths that competitors struggle to reproduce such as intellectual property, distribution channels and repeat business.
Performance of fund versus sector and index since launch
Source: FE Analytics
This approach has worked extremely well over the longer term as, since launch, Liontrust Special Situations has been a top-decile performer in the IA UK All Companies sector with returns of 227.21 per cent, meaning it has nearly tripled the FTSE All Share’s gain over that time.
The fund has also beaten the index in eight of the last 10 calendar years (including seven years of top-quartile gains) and has been top-quartile for alpha generation relative to its benchmark, maximum drawdown, risk-adjusted returns and annualised volatility over the past decade.
CF Miton UK Value Opportunities
Ben Conway, who co-runs the Hawksmoor Distribution and Vanbrugh funds of funds, says that the biggest risk to an investor is the price they pay for shares – not how large the businesses is.
Therefore, he thinks the very small-cap end of the UK market currently offers the best opportunities from a valuation and growth perspective, but he understands many investors may not feel comfortable holding such a niche offering.
Instead, he says they should look at multi-cap funds that have the ability to invest all across the market – such as CF Miton UK Value Opportunities.
“Generally speaking, if you want to shy away from such a specialist area of the market, then choosing a good and genuinely multi-cap manager is still a wise call,” Conway said.
“You always hear fund management companies drone on about the importance of good stock-picking and generating alpha as well as beta. Currently, the ability of a manager to generate alpha has never been more important – given the expensiveness of equities generally.”
“George Godber and Georgina Hamilton, the current darlings of the UK All Companies sector, have benefitted from their complete market cap agnosticism and have generated terrific alpha as a result.”
The now £724m CF Miton UK Value Opportunities fund was only launched in March 2013 but has turned out to be one of the ‘go-to’ options in the sector due to its strong risk-adjusted returns.
According to FE Analytics, the fund has been the peer group’s second-best performer since inception with gains of 56.27 per cent. As a point of comparison, the FTSE All Share has only made 15.85 per cent over that time.
Performance of fund versus sector and index since launch
Source: FE Analytics
Despite the fact it has tended to hold very little in FTSE 100 stocks, Godber and Hamilton’s fund has not been top-decile for its alpha generation, but for its maximum drawdown and volatility over that time. It has also had the highest Sharpe ratio in the 259-strong sector since launch.
Currently, the fund – which follows a strict value-orientated strategy – holds 23.1 per cent in the FTSE 100, 28.8 per cent in the FTSE 250, 17.2 per cent in the FTSE Small Cap index and 22.2 per cent in AIM-listed stocks.
The managers also hold 7.3 per cent in cash, possibly reflecting a lack of value in the current UK equity market.
The final fund is also highly value-orientated as it is run by FE Alpha Manager Henry Dixon, who used to work with Godber and Hamilton at Matterley.
Conway added: “We would also recommend their former colleague, Henry Dixon (Man GLG Undervalued Assets) – whose fund has received fewer plaudits (and hasn’t performed quite as well) but who currently believes that his portfolio is as cheap relative to the market as it has ever been.”
“His six monthly letters are superb and must-reads in my opinion.”
The £442m Man GLG Undervalued Assets fund was launched by Dixon in November 2013.
Though the manager holds 34 per cent in the FTSE 100 index (including top 10 positions in the likes of RBS, BP and Rio Tinto), the rest of portfolio is split between mid and small-caps. Like the Miton fund, Man GLG Undervalued Assets also has a relatively high cash weighting at 8.5 per cent.
Our data shows that, since launch, the fund has comfortably beaten both the FTSE All Share and is a top quartile performer in the IA UK All Companies sector with gains of 13.5 per cent. Those numbers include top-quartile returns in the choppy markets of 2014 and 2015.
Performance of fund versus sector and index since launch
Source: FE Analytics
However, it has fallen further than the wider market in 2016’s tumultuous start thanks to its focus on value.
Like the other funds mentioned in this article, however, Man GLG Undervalued Assets has been top-quartile for its alpha generation relative to the index, its risk-adjusted returns and annualised volatility over that time.
