Smaller companies tend to be a riskier part of the equity market but are a popular option with many investors thanks to the potential for very high returns. 
In this series, we have been examining the performance of the some of the oldest members of the Investment Association universe to see which have most consistently delivered for their investors over the long run. We now turn our attention to the smaller companies peer groups.
To recap, we looked at funds with track records of 20 years or longer to discover their average decile rankings over the 61 rolling five-year periods between 30 June 1998 and 30 June 2018. We then shortlisted those with an average five-year decile score of 3.5 or lower.
After reviewing all of the Investment Association’s smaller companies sectors, only four funds made the grade. We look at them in more detail below.
Marlborough Special Situations
The fund that passed our filters with the best average decile ranking was Marlborough Special Situations, which scored 2.03. Of the 61 five-year periods reviewed, this £1.7bn fund was in the IA UK Smaller Companies sector’s first decile for 25 of them.
Its total return over the 20 years we looked at in this research has been nothing short of spectacular. Our data shows that the fund made 3,222.67 per cent between June 1998 and June 2018; this was the sector’s highest total return by some margin as Artemis UK Smaller Companies came in second place and made ‘only’ 1,630.44 per cent.
Performance of fund vs sector between 30 Jun 1998 and 30 Jun 2018
Source: FE Analytics
FE Alpha Manager Giles Hargreave has been running the fund since July 1998 with Eustace Santa Barbara joining him as co-manager in September 2014. Hargreave and his team at Hargreave Hale
are well-connected to the UK small-cap market and this has been a great benefit for their bottom-up approach to investing.
The FE Invest team said: “Hargreave has consistently outperformed the market and peers. In particular, the fund has outperformed in falling markets, such as the crisis year of 2008, and more recently in the sell-offs in 2011 and 2014.
“This is mainly due to good stock selection and risk management in troubled positions, but is also due to maintaining a high number of stocks, which means that huge losses in any one holding can’t affect the portfolio too much.”
Marlborough Special Situations has an ongoing charges figure (OCF) of 0.79 per cent. It holds four FE Crowns and is a member of the FE Invest Approved List.
Threadneedle European Smaller Companies
Moving over to the IA European Smaller Companies sector, Threadneedle European Smaller Companies has a place on this research’s shortlist thanks to an average five-year decile ranking of 2.38.
The £2.5bn fund has made a 1,261.88 per cent total return over the 20-year period in question and was in the peer group’s top decile for 32 of the 61 five-year periods we examined. It is the sector’s best performer over the full 20 years but it’s important to note that there are only nine funds with a track record this long.
Performance of fund vs sector between 30 Jun 1998 and 30 Jun 2018
Source: FE Analytics
FE Alpha Manager Mark Heslop has managed the portfolio since January 2013 and previous managers since its launch in November 1997 have included David Dudding, Philip Dicken and Paul Doyle. The fund typically holds 80-100 stocks and invests outside of the top 225 companies in the FTSE World Europe ex UK index, offering the opportunity to find under-researched companies.
Explaining the approach taken on the fund, Heslop said: “Our main focus in managing this portfolio is on stock selection, informed by macroeconomic and thematic views. We favour companies that have a competitive advantage and pricing power generated by brands, patented processes, regulatory barriers to entry and strong market positions.”
Threadneedle European Smaller Companies has a 0.88 per cent OCF.
Barings Europe Select Trust
Another IA European Smaller Companies member that has made it onto the shortlist is Barings Europe Select Trust which has an average five-year decile score of 3.13 while has made 758.78 per cent over the full two-decade time frame.
It has been managed by Nicholas Williams, head of the small-cap equities team at Baring Asset Management, since January 2005 with Colin Riddles and Rosie Simmonds joining as co-managers in October 2016. The fund was launched in October 1984.
Performance of fund vs sector and index between 30 Jun 1998 and 30 Jun 2018
Source: FE Analytics
Square Mile Investment Consulting & Research, which gives the fund an ‘AA’ rating, said: “This fund is managed by a very capable, experienced portfolio manager.
“We believe that Williams has a sensible approach to investing in this space. He considers that opportunities exist in small- and mediumsized companies listed in Europe, especially in companies with both growth potential and reasonable market valuations.”
Barings Europe Select Trust has an OCF of 0.80 per cent and is yielding 1.40 per cent. It is a member of the FE Invest Approved List.
Schroder US Smaller Companies
The final longstanding smaller companies fund on this research’s shortlist is Schroder US Smaller Companies, which has been headed up by FE Alpha Manager Jenny Jones since December 2002 with Robert Kaynor being appointed co-manager earlier this year; Ira Unschuld ran the portfolio between 1992 and 2002.
Between June 1998 and June 2018, the £878.9m fund established an average five-year decile ranking of 3.46 and was in the IA North America Smaller Companies sector’s top decile in 27 of the 61 periods we reviewed. Its 775.47 per cent total return over 20 years is the largest in the peer group.
Performance of fund vs sector and index between 30 Jun 1998 and 30 Jun 2018
Source: FE Analytics
The FE Invest team, which has included the fund on its Approved List, said: “Jenny Jones has built a robust process over the course of her extensive US equity investing career. It is also reassuring to see that Robert Kaynor has been added as a co-portfolio manager, mitigating key man risk.
“This fund also benefits from Schroder’s extensive network of global analysts and background infrastructure, which supports the dedicated US equity team in which every member is given responsibility for the portfolio’s performance and reporting lines are clearly defined.”
Schroder US Smaller Companies has an OCF of 0.91 per cent.