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Choosing a suitable small cap fund

This article is part of
Guide to Investing in Small Caps

The process of selecting a small cap manager is no different from other managers, according to Adrian Lowcock, senior investment manager at Hargreaves Lansdown.

However, the emphasis should be on the stock selection skills and the knowledge the manager has of the companies and the selection processes are in place, he stresses.

“A critical consideration is how the manager addresses poor performing investments. Good managers tend to cut their losses quickly and move onto the next idea as they have plenty of those.”

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The track record and experience of the fund manager are key, agrees fund manager Neil Hermon, co-head of UK equities at Henderson Global Investors.

Faith and patience are necessary client virtues when it comes to small cap investing, whoever the provider.

The Financial Conduct Authority does not make any specific references to advisers recommending small cap funds. So long as they are Ucits funds and the adviser provides a clear description of where it invests, there are no specific issues for advisers to wrestle with.

But ‘Know Your Client’ – KYC – is important as ever. Advisers must therefore apply strict asset allocation rules to ensure the client does not have too little or too much in the sector.

While investment returns have been impressive recently, small caps can lose money quickly when conditions move against them.

Smaller companies can play a role in all portfolios, believes Mr Lowcock, but he emphasises that as they are riskier investments older clients looking for income and wanting to protect capital should make sure they do not have too much smaller companies funds as they are likely to be more volatile.

“Although we are seeing some increasing opportunities for income seekers in the small cap market this should be seen as a compliment to core equity income holdings.”