Schroders duo wary of small-cap performance

Schroders duo wary of small-cap performance

Schroders managers Paul Marriage and John Warren have said they are treading carefully in the small-cap space, in spite of stocks holding up well in the face of August’s headline market falls.

The managers of the £239m Schroder Absolute UK Dynamic fund said that smaller companies could be vulnerable to shocks, even though they had weathered the market downturn better than their large-cap counterparts.

August’s market fallout was triggered by an 8.5 per cent drop in the Shanghai Composite index on August 24, and resulted in large-cap indices being hit badly, with the FTSE 100 falling 4.7 per cent in one day.

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But small caps have had stronger recent performance.

The FTSE 100 has fallen by 2.2 per cent this year to September 16, data from FE Analytics shows. In contrast, the FTSE 250 index has enjoyed an 8.2 per cent rise, while the FTSE Small Cap has increased by 7 per cent. Both indices also outperformed the blue-chip index in August.

“The macro-led woes that spooked markets and left large-cap indices across the world nursing high single-digit losses did not drag smaller companies down to the same extent,” Mr Warren said.

“No doubt this was in part due to the more domestic bias and lack of commodity exposure in smaller companies.”

But he added: “We need to be careful not to think that just because small caps fared reasonably well, wider market moves don’t matter. If the markets were to roll over again in September, then maybe more sellers might appear.

“After all, fund inflows soon become outflows when markets are weak. We are also conscious of the potential of the small-cap ‘catch-down’ effect that can sometimes follow market falls.”

As a result of these concerns, Mr Warren was taking a cautious approach to stock selection, seeking out value and growth where he thought it was not being recognised by the market.

He said: “We will remain watchful for any opportunities to purchase discounted lines in our preferred names and equally take profits from some of our best 2015 performers at the right levels.”

Some shares within the Absolute UK Dynamic fund that had performed well in the past 12 months, including Renold and Gooch & Housego, were hit by the market fallout.

However, one-day drops in some of the portfolio’s “more aggressive growers”, such as Fever-Tree and Clipper Logistics, were quickly recovered, the managers said.

Ultra Electronics was added to the fund in August, because of the appeal of its “intellectual property, high returns and strong margins”.

The fund has returned 26.3 per cent across three years and 63.5 per cent across five years, while year to date it has delivered 12.5 per cent, FE Analytics data shows.