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Fund Review: Schroder UK Dynamic Smaller Companies

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Fund Review: UK Smaller Companies

An unexpected surge in inflows at the end of 2013 saw the £568.2m Schroder UK Dynamic Smaller Companies fund ‘hard close’ in January 2014 as assets neared £1.3bn, which manager Paul Marriage notes was too much money too quickly.

But as small caps fell out of favour and investors sold out of the fund the assets have roughly halved to a more sustainable level, with the fund reopening in October 2014.

Mr Marriage, who has run the fund since January 2006, alongside John Warren, says: “It is quite easy for a very small, small cap fund to make lots of money, but is not usually sustainable – and equally it is more difficult for a big fund to make lots of money. We have been on both sides and it is about trying to make a sensible amount of money for people regardless of fund size, and hopefully regardless of market conditions.”

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Originally a Cazenove fund and rebranded following Schroders’ acquisition of the firm in 2013, the investment process is “100 per cent bottom-up stockpicking” according to Mr Marriage, with the team not looking at benchmarks, sectors or any macro.

He explains: “Our macro is listening to lots and lots of company management teams telling us about their businesses, and maybe from that we might get a theme that certain types of businesses are in a good place.”

The portfolio currently holds roughly 50 stocks, with a straightforward one in, one out approach, and a clear focus on meeting the management team. The core investment theme uses the P3M approach comprising Product, Market, Margin and Management.

“We [are looking for] a core differentiated product, and then a market [that] is niche, margin growth potential, and management who own stock. Fever Tree is a good entrepreneurial business, run by a small team, with manufacturing outsourced to a company in Wales that owns 10 per cent of the business – we like that structure. It is a good example of something new coming in and making a difference to the portfolio in its first year.”

The A share class sits at a level five out of seven on the risk-reward spectrum, with ongoing charges of 1.66 per cent, according to its key investor information document.

For the 12 months to April 1 2015 the portfolio has struggled, recording a loss of 12.45 per cent compared with an average sector loss of 3.22 per cent, and a small increase in the FTSE Small Cap (ex Investment Trusts) index of 0.39 per cent, according to FE Analytics.

Longer term performance is more attractive, with the five-year return of 150.84 per cent and 10-year return of 253.11 per cent outperforming both the sector and the index.

Mr Marriage acknowledges: “It has been a tough period for us. We were always going to have to pause for breath at some point. [Then we] had a big surge – [small caps] was one of the most popular asset classes and we got the full benefit of that in inflows.

“Clearly we’ve had a reversal, small caps are out of favour, our fund closed and people sold out. The fund has halved and gone back to a much more manageable level. Performance has been tough in that closure period and it will take a while for us to find our groove again, but we feel we’re getting there, and the portfolio feels great.