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Fund Review: US Smaller Companies


Figures from the Investment Association (IA) show its North American Smaller Companies sector has seen net retail outflows in eight of the past 12 months to October 2015, including £9m of outflows in October.

This is not a recent trend. IA figures also showed outflows in 10 of the 12 months between October 2013 and October 2014.

But while investors are pulling money out of US small caps, of the 13 funds listed in the sector with a one-year track record to December 2 2015, only two have recorded a loss. The Legg Mason IF Royce US Smaller Companies fund sits at the bottom of the list over one year with a decline of 1.1 per cent, while the Artemis US Smaller Companies fund tops the sector over the same period with a return of 17 per cent.

Over a longer time frame sector performance has been decent, delivering an average return of 130.4 per cent in the 10 years to December 2 2015, according to data from FE Analytics.

Uncertainty regarding the implementation and schedule of US interest rate hikes could be having an effect on investor sentiment, but this might be about to change.

Chris Berrier, manager of the Brown Advisory US Smaller Companies fund and co-manager of the US Small-Cap Blend fund, suggests the investment case for US small caps is growing stronger. These companies are typically more insulated from the negative effects of a strong US dollar and weakening global demand because roughly 80 per cent of their sales are linked to the domestic economy.

He notes that in the past five years “we have seen a highly correlated market with low volatility, thanks in part to quantitative easing. The difference in performance between established, quality businesses and those that are currently unprofitable but have positive long-term earnings forecasts has been blurred.”

Therefore he suggests that active managers that favoured a fundamental, research-driven, bottom-up stockpicking approach would have found the US small-cap space a “challenging environment [in which] to differentiate themselves from their passive peers”.

But “it appears this is beginning to change,” he adds. “The market has once again started to discriminate between companies on the basis of ‘quality’, thus rewarding bottom-up stockpickers. As valuations are somewhat richer and growth less pronounced, we expect the market to continue with a more discriminating attitude to company ratings. In addition, with the impending interest rate rise, we believe volatility should continue and we will be ready to take advantage of investing in great companies at attractive prices.”

Appetite for large-cap US equities has also dropped off in recent months, with the IA North America sector recording net retail outflows of £103m in October. But with the US Federal Reserve expected to introduce the first rate hike for more than nine years this week, it will be interesting to see if the removal of uncertainty is enough to bring UK retail investors back to the US market.


North Atlantic Smaller Companies

This investment trust launched in 1973 had net assets of £368m as of July 31 2015. It aims to provide capital appreciation through investments in a portfolio of smaller firms principally based in countries bordering the North Atlantic Ocean. Managed by Christopher Mills at Harwood Capital, the trust has topped the combined list of IA- and AIC-listed US small-cap portfolios across both one and three years. It delivered a total return of 81.1 per cent for the three years to December 2 2015 against the AIC North American Smaller Companies sector average of 46.1 per cent.

JPMorgan US Smaller Companies Investment Trust

Managed by Don San Jose and Dan Percella, this £111m investment trust aims to deliver capital growth by investing in firms that have a “sustainable competitive advantage”. The trust tops the AIC list of US small-cap portfolios across the five years to December 2 with a total return of 119.9 per cent compared with the AIC sector average of 57.6 per cent, according to data from FE. The trust’s largest sector weighting is to financial services at 23.8 per cent of the portfolio.


Threadneedle American Smaller Companies

This £592m fund has been managed by Diane Sobin since April 2012 and aims to provide capital growth by investing at least two-thirds of its assets in shares of smaller firms. The fund’s long-term performance has been consistent, propelling it into the Investment Adviser 100 Club for the first time in 2015. Its 10-year return to December 2 of 170.5 per cent topped the list of 11 open-ended and closed-ended portfolios listed in the AIC and IA sectors. The largest sector weighting is to information technology at 17.2 per cent of the portfolio, while its top 10 holdings include Pinnacle Foods and BankUnited.

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