There are just three IA UK Smaller Companies funds that hold a maximum Crown Rating of five and have a low correlation to at least one of their peers rated as highly.
Top-rated small cap funds with a low correlation to one another
Source: FE Analytics
In previous articles in the series, we looked at top-rated funds with a low correlation to their peers in the IA UK Equity Income and IA UK All Companies sectors. A low correlation is defined as being less than 0.70, where 1 = a perfect correlation and 0 = no correlation.
Here we take a closer look at the uncorrelated small-cap funds.
Manager Ken Wotton combines valuation techniques developed in the private equity industry with an emphasis on protecting capital and achieving long-term growth.
To reduce the risk associated with investing in the micro-cap area of the market, he avoids early-stage companies with a market cap of less than £50m, as well as more volatile sectors such as real estate, mining and oil & gas.
He then seeks out profitable and attractively priced companies that are sitting on significant amounts of cash.
The FE Invest team likes Wotton’s research process, which he honed at private equity firm Livingbridge before it was bought out by Gresham House in 2018.
“The move has allowed the team to continue managing money as it always has, whilst benefiting from the resources that a listed company can offer in terms of a bigger team, as well as coverage of companies from their early stages into publicly listed entities,” the analysts said.
However, they warned that investors must be aware that this fund invests predominantly in AIM-listed companies, which can potentially be riskier than stocks listed on main markets.
Data from FE Analytics shows LF Gresham House UK Micro Cap has made 381.35 per cent over the past decade, compared with gains of 244.39 per cent from its sector.
Performance of fund vs sector over 10yrs
Source: FE Analytics
It is £192m in size and has ongoing charges of 0.98 per cent.
Early last year, TB Amati UK Smaller Companies was named one of the most consistent IA UK Smaller Companies funds of the decade, having beaten its sector average in eight of the past 10 calendar years.
The fund is headed-up by FE Alpha Manager Paul Jourdan as well as David Stevenson and Anna Macdonald.
Each manager is responsible for researching different industries, but has to convince their colleagues on the merits of each stock they recommend before it is added to the fund. They look for businesses with competitive advantages and strong management teams.
The fund has almost doubled in size over the past year. However, at £350.2m it is still smaller than many of its peers in the sector, which the analysts at FE Invest said gives it an advantage in this area of the market.
“This is because the managers are able to buy the smallest stocks in their universe which have greater potential for outperformance and which become unavailable to funds as they grow,” they explained.
“It also means they are able to buy and sell meaningful positions quicker and without losing money on the trades, unlike larger funds which are forced to become major shareholders in companies if the investment is to be meaningful.”
The analysts noted Amati runs a venture capital trust (VCT), which invests in companies listed on the Alternative Investment Market, allowing the managers to access them before they graduate to the main market.
“These considerations make this fund a good option for those seeking full exposure to the outperformance potential of smaller companies,” they added.
Data from FE Analytics shows TB Amati UK Smaller Companies has made 417.92 per cent over the past decade, compared with gains of 167.21 per cent from its Numis Smaller Companies + AIM (ex IT) index benchmark.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The fund has ongoing charges of 0.92 per cent.
This fund’s veteran manager Paul Mumford aims to deliver long-term growth, predominantly by investing in companies listed on the Alternative Investment Market.
Mumford said his focus on the AIM index allows him to invest in shares “which often fall under institutional radar screens and in areas where the greatest potential exists”.
This fund was the ninth best-performer in the IA universe in the first half of last year, with gains of 29.4 per cent, even though the AIM index was up only 7.87 per cent over the same period.
Mumford attributed this to the rise in one stock, oil & gas production and infrastructure company RockRose, which acquired North Sea assets from Marathon Petroleum. This doubled production, substantially increasing reserves and causing its cash balance to rise. The stock was up more than 250 per cent last year.
The manager was joined by Nick Burchett on the fund early last year, although they had already worked together for almost two decades. Mumford said: “Nick and I have a tried and tested working relationship and a lot of this is down to us seeing eye to eye on the fundamentals of investment – including the importance of getting to know the companies you invest in inside-out.
“The complementary combination of my stockpicking skills and Nick’s insight into timing trading has brought a lot of success to the AIM and Opportunities funds, which makes this move a natural next step for the fund.”
TM Cavendish AIM has made 341.18 per cent over the past decade compared with gains of 64.41 per cent from the FTSE AIM All-Share.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is just under £100m in size and has ongoing charges of 0.84 per cent.