UK smaller companies funds managed by the likes of Old Mutual, Liontrust and Jupiter are sitting at the top of the sectors on a wide range of risk and return measures in FE Trustnet research, but the strongest overall performance has come from one of the peer group’s less well-known members. 
Despite the uncertainty created by the UK’s decision to leave the EU, smaller companies funds have enjoyed a relatively strong run over the past five years. FE Analytics shows that the average fund in the IA UK Smaller Companies sector made a 112.96 per cent total return in the five years to the end of 2017, compared with a 68.27 per cent gain from the IA UK All Companies sector and a 66.20 per cent rise from the average IA UK Equity Income fund.
In this ongoing series, we looked at IA UK Smaller Companies members’ five-year returns up to the end of 2017, the annual returns of 2017, 2016 and 2015, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown and upside and downside capture relative to the sector average.
We then worked out each fund’s average decile ranking for each of these 10 rankings to find out which have most consistently been among their very best members of their peer group for a wide range of return and risk measures.
Performance of fund vs sector over 5yrs to the end of 2017
Source: FE Analytics
The fund that performed best in this research is TB Amati UK Smaller Companies, which has taken a clear lead with an average decile ranking of 1.8. The £120m fund is in the sector’s top decile for its five-year returns, performance in 2016 and 2017, maximum drawdown and Sharpe ratio; it is also in the second decile for another three measures.
FE Alpha Manager Paul Jourdan, Douglas Lawson, David Stevenson and Anna Wilson run the portfolio and Amati also operates two venture capital trusts investing in unquoted companies. This gives the managers the opportunity to follow companies before they publicly list and develop a relationship over many years.
TB Amati UK Smaller Companies is a member of the FE Invest Approved List, with analysts liking the fund’s small size and strong track record. “The fund is smaller than many of the most successful funds in the sector. This means the managers are able to buy the smallest stocks in their universe that have greater potential for outperformance and become unavailable to funds as they grow,” FE Invest said.
“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 their investment is to be meaningful.”
Old Mutual UK Smaller Companies Focus comes in second place, but is some way behind the Amati fund with an average decile ranking of 2.7. It is the IA UK Smaller Companies sector’s first decile for five-year returns, its performance in 2016 and 2017, alpha generation, Sharpe ratio and upside capture; however, it is in the bottom decile for annualised volatility. Its 226.57 per cent total return is the highest in the sector.
It must be noted that the £366.4m fund has only been run by current manager Nick Williamson since the start of 2016 and was managed by Daniel Nickols with Williamson as deputy prior to this. Williamson made the portfolio more concentrated when he took over, but – as mentioned above – did achieve top decile returns over his first two years on the portfolio.
The approach behind the fund aims to deliver outperformance in all economic phases so the manager focuses on the stocks that he thinks will do well in the current economic environment. At present, the five FE Crown-rated fund has 22.5 per cent of its portfolio in financials, 18.7 per cent in industrials and 16.1 per cent in consumer services.
Source: FE Analytics
Liontrust UK Smaller Companies – run by FE Alpha Managers Anthony Cross and Julian Fosh along with Victoria Stevens and Matthew Tonge – has also placed well in this research after achieving an average decile ranking of 2.8.
Its five-year return of 143.07 per cent puts it in the sector’s fourth quartile but it’s among the top 10 per cent of its peers for performance in 2015 and alpha. Furthermore, it is in the second decile for returns in 2016, volatility, maximum drawdown, Sharpe ratio and downside capture.
The managers make use of Liontrust’s Economic Advantage process, which looks for companies with distinctive intangible strengths – such as intellectual property, strong distribution channels and significant recurring business – that their rivals struggle to replicate.
The largest portfolio in the IA UK Smaller Companies sector is FE Alpha Manager Giles Hargreave and Eustace Santa Barbara’s Marlborough Special Situations fund, which has assets under management of £1.5bn. It is ranked 17th out of 44 funds with a long-enough track record, posting a 4.2 average decile ranking.
Other large offerings include Harry Nimmo’s £1.5bn Standard Life Investments UK Smaller Companies fund, which is ranked 24th with an average decile ranking of 5.9, and Daniel Nickols’ £1.3bn Old Mutual UK Smaller Companies fund, which is in 11th place with an average decile ranking of 3.8. Both Nimmo and Nickols are FE Alpha Managers.
Performance of fund vs sector over 5yrs to the end of 2017
Source: FE Analytics
Looking at the bottom of the table and the worst performer in this research is the £170.2m Janus Henderson UK & Irish Smaller Companies fund with a score of 8.8. This one FE Crown-rated fund is in the sector’s 10th decile for five-year returns, performance in 2015, alpha generation, maximum drawdown, Sharpe ratio and upside capture.
Also failing to shine over the past five years are Baillie Gifford British Smaller Companies, Halifax Smaller Companies and JPM UK Smaller Companies. All three of these funds have scored an average decile ranking of 8.4 in this research.