Your IndustryAug 28 2014

Key questions for smaller companies fund managers

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The range of companies falling into the ‘UK smaller’ grouping is diverse in terms of type of company, area of business, success rate and, most importantly, quality.

As in other areas however, Catherine Stanley, manager of the F&C UK Smaller Companies fund, says performance differentials between individual managers is large.

Steve Kenny, head of retail sales at Kames Capital, experience of the management team is important, but that arguably of greater interest is the style in which they invest to get a handle on how their fund is likely to behave in different market conditions.

Mr Kenny says: “Reviewing past performance can help but advisers really need to have a solid grasp of how the performance is generated and appreciate the circumstances in which a fund might underperform.”

He says advisers should ask:

• How do they choose which companies to invest in?

• Do they meet the companies personally?

• How volatile is their fund compared to other funds?’

Liquidity is important too, he adds. He suggests additional questions to assess this could include:

• How quickly can the manager enter or exit positions?

• Do they struggle to invest capital without moving the market price of the stock?

• Do they have to buy companies they don’t like because they have to invest somewhere?

James Dalby, market intelligence manager of Aviva, says advisers should look for a manager of firm with a long track record and some performance consistency.

He says there are some funds that really stand out among their peers and often he says you will find these held within the portfolios of multi-manager or fund of funds propositions. He therefore suggests advisers take a look at what multi-managers are doing and who they are backing.

Mr Dalby says: “Research is King. So asking how a fund manager goes about this is important and you also want to see some honesty around past successes and failures.

“A Smaller Companies manager who can’t point to some significant failures either hasn’t lived or is paying too much attention to the fund marketing department.”

If ‘quality’ is a key consideration then Ms Stanley says investors should perhaps seek a fund manager who clearly favours companies that are run by proven individuals/teams, are financially stable, cash generative and enjoy a clear and defensible competitive advantage over their peers.

Ms Stanley says: “As when selecting any fund it should all be about gaining an understanding of the manager’s philosophy and their process.

“Once this is done you can then set about analysing fund performance, volatility, turnover and other portfolio characteristics to see if their actions and results match their words.

“A manager consistently applying a clearly articulated and robust investment process that has worked in the past is more likely to deliver performance in line with expectations than one that hasn’t.”