At a time when many giant funds have been viewed as cumbersome because of their size – particularly against a more uncertain investment backdrop – smaller, more nimble funds could have a greater advantage. 
As such, Trustnet has decided to look at some of the top-rated and top performing ‘under the radar’ funds with assets of less than £100m.
The first fund is the £33.2m FP Octopus UK Microcap Growth fund run by Richard Power and deputy managers Dominic Weller and Chris McVey.
The fund has outperformed both its sector and index since its launch in 2007, with a total return of 141.61 per cent compared with a 134.60 per cent gain for the average IA UK Smaller Companies peer and a 66.13 per cent return for the Numis Smaller Companies plus AIM (excluding investment companies) benchmark.
Performance of fund versus sector and index since launch
Source: FE Analytics
Focusing on the sub-£100m companies that “most small-cap fund managers don’t even look at,” Power (pictured) looks for micro-cap businesses listed on the London Stock Exchange and Alternative Investment Market “capable of being [worth] multiple billions – that’s what excites us”.
Made up of 50-80 holdings, the FP Octopus UK Microcap Growth fund is structured around a core of ‘established leaders’ – high-quality businesses that make up 75 per cent of the portfolio.
The remainder of the portfolio is made up of satellite ‘emerging stars’ holdings and includes business with the potential for greater growth.
This blended approach draws on the expertise it has as a manager of £1.8bn in assets across its AIM range of products.
Its ‘established leaders’ includes companies with a strong track record of cash generation, experienced management and superior growth.
Meanwhile, the ‘emerging stars’ include companies about to come to market, those with exceptional growth opportunities, and those where market inefficiencies have led to mis-pricing.
The managers believe that the fund size give it the ability to take advantage of “compelling” opportunities in the market and have fewer concerns over liquidity as a result.
Yet, while FP Octopus UK Microcap Growth hunts at the smaller end of the UK equity market, it does not necessarily mean that all its holdings are smaller names that nobody knows about.
“We don’t have restrictions of when we must sell a business if it gets to [a market cap of] £1bn,” said Power. “If we think this business could still double its profits over the next three years, we’ll want to continue to hold that investment opportunity to maximise the returns for our underlying shareholders.
“That’s ultimately what we’re meant to do. But what the product is doing is finding these opportunities much earlier.”
One such example is RWS Holdings – a patent translation business working with major pharma tech businesses – which Octopus has invested in since 2005 in their other mandates and has become a £1.7bn company. The fund manager said its current size does not necessarily translate to its growth opportunity being over.
“Their ambition and their excitement about the future is greater than it’s ever been, and again, their ability to double those profits over the next few years is still there,” he said. “So, yes, we’ve taken a lot of profits as we’ve gone, but it’s still in our top-10 holdings because we can see that growth.”
Octopus’ bought and sold holdings from sub £100m to now
Source Octopus Investments
Power said the Octopus team constantly challenge how an investment will stand up over time.
This compared to a company such a Fever-Tree, premium tonic drinks brand, which the fund initially invested in at IPO but sold out of in 2017, despite it going on to become a major brand, as the team felt it had become fully valued.
“We’re monitoring where they are on that journey all the time. If the investment cases deteriorated, we’ll sell and move on,” he explained.
While the team have had a successful track record of backing their winners, however, modern portfolio construction theory has made it more difficult for smaller funds in such a niche area to stand out.
“If you go back 25 years or so, smaller companies used to be a bigger part of people’s portfolios,” said Power. “And then of course, asset allocation evolved to be not just global, but multi-asset class.
“And UK equities, which were 30 years ago a big part of people’s portfolios [have] shrunk down and smaller companies have often fallen off the bottom of the page.”
And while technology has allowed investors to more easily research and analyse funds, it remains a challenge for smaller strategies to stick out, said Power, particularly if they don’t find their way onto platforms’ ‘buy’ lists.
“We’ll be patient and hopefully performance will continue and we will appear on [more] people’s radar screens,” he said.
Notwithstanding the fund’s size, it is a strategy that investors should consider, according to AJ Bell’s head of active portfolios Ryan Hughes.
Hughes said parent group’s existing VCT and EIS businesses is an advantage to the FP Octopus UK Microcap Growth team as it puts them “in a good place to really understand the journey that a small company goes on as it moves through the growth phase” from privately-owned to public markets.
He added: “One of the challenges of a very small fund is the additional running costs that come with it and this is evident in this fund with an OCF [ongoing charges figure] of 1.25 per cent putting it at the more expensive end of the market which may be off-putting for some investors looking at this part of the market.
“Ultimately, the fund has a good track record but perhaps not quite good enough to stand out from the likes of Liontrust and BlackRock who will be perceived by many as a ‘safer’ choice given the strength of the brand, size of the funds and profile of the fund managers.”
Hughes concluded: “In many respects, this is exactly the challenge faced by smaller managers with smaller funds.”