InvestmentsMay 18 2015

Fund Buyer View: Overlooking a small fortune

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Fund Buyer View: Overlooking a small fortune

I’ve read a few articles saying UK smaller companies have fallen out of favour with retail investors in recent months.

The data supports this: while Isa money has increased sevenfold in small caps over the past decade against a threefold increase in the IA UK All Companies sector, small caps have seen outflows in 10 of the past 12 months.

But if you look at the data more closely, this isn’t a recent phenomenon – investment into UK smaller companies has been declining for almost 15 years.

Once you strip out the (phenomenal) performance effect, inflows have fallen by almost two-thirds since 2000. It is a vastly under-owned area of the market.

This doesn’t make sense. While uncertainty surrounding both the outcome of the general election and the economic impact of rising interest rates has prompted a recent sell-off in the asset class, its long-term outperformance compared with larger companies is outstanding, and there is no reason to doubt this shouldn’t be the case in the future.

Largely under-researched, there are more than 1,500 companies to choose from, as opposed to 350 large- and medium-sized companies. So this arena presents real opportunities for good stock-pickers to show their skills.

Importantly, while smaller companies generally are fair value compared with their large- and mid-cap peers, micro caps are at a discount right now, offering a good entry point.

So if investors can be tempted back to this sector, the place to be right now is in our Elite-rated Marlborough UK Micro-Cap Growth fund.

At the moment it ticks the box in terms of targeting the best area of the small-cap universe to be invested in and is run by one of the best UK small-cap teams.

Hargreave Hale is a premier small-cap boutique and this fund has a strong team of expert stock-pickers, which has consistently proven itself for almost 10 years.

The fund has outperformed its larger Special Situations brother (which has also registered exceptional performance), since it launched in 2004.

It is a small-cap growth fund co-managed by the renowned Giles Hargreave and Guy Feld, with the former known for his ability to adapt to changing market conditions.

Mr Feld, meanwhile, focuses on the technology sector and other ‘new economy’ growth companies. His stocks have a market cap of less than £250m at purchase, although a substantial amount will be under £150m.

Investing in these smaller companies is risky, but the fund is heavily diversified, with more than 200 holdings. This helps to protect investors from some of the stocks that inevitably don’t work.

The fund has somewhat taken over from Marlborough Special Situations, which has now become too big to invest in the very smallest companies.

The UK Micro-Cap Growth fund invests in firms with disruptive technologies or companies that are leaders in niche markets.

Over the next 15 years, this area of the market could prove very rewarding once again. But unless investors can be convinced otherwise, most look set to miss out.

Darius McDermott is managing director at FundCalibre