The first six months of this year have seen UK funds of all kinds suffer, with the blame largely laid at uncertainty in the lead up to the EU referendum. Therefore it is no surprise investors have been flocking from the UK All Companies sector to others including Targeted Absolute Return and Global.
So far in 2016 UK markets (particularly the FTSE 100) have been battling worries surrounding China, central bank policies and oil prices. In spite of the market turbulence at the start of the year, the UK Smaller Companies space has been largely resilient to any market woes. The sector typically tends to overcome any macro volatility and see stronger returns than the average UK All Companies fund.
During April, UK Small Companies saw net retail sales of £17.5m – a sight drop from £20m the month before. UK Smaller Companies funds were more popular in Isa sales, with net sales of £23.4m across the five platforms the Investment Association uses for sales figures (Cofunds, Fidelity, Hargreaves Lansdown, Old Mutual Wealth and Transact).
During 2015, the FTSE 100 fell by 1.3 per cent, while the FTSE Small Cap ex IT index rose 3 per cent.
The IA UK Smaller Companies sector also generated an average return of 14.9 per cent in 2015 as a whole, while the UK All Companies sector saw an average 4.9 per cent return, according to FE data.
One reason UK Smaller Companies may attract fewer investors than the UK Equity Income space, for example, may be due to volatility. The IA stipulates that funds must invest at least 80 per cent of their assets in UK equities of companies that form the bottom 10 per cent of the market by capitalisation.
This end of the market can see much more volatility than you typically get from larger companies, but at the same time it can also have much greater room for growth compared with large-cap companies. As such, due to the typically more volatile attitude of the funds, investors can largely expect to be paid on taking that risk.
Table 1 shows the top 10 performing unit trusts and investment trusts in the IA and AIC’s Smaller Companies sectors over five years.
While performance across the sector over one year is not particularly solid, its five-year performance tells a much different story. The top-performing unit trust is the R&M UK Equity Smaller Companies fund, managed by Philip Rodrigs.
The £666.6m fund saw a return of £2,421 over the five-year period based on an initial £1,000 investment — 19.4 per cent annually. The fund is largely invested in industrials (25.3 per cent) and consumer services (16.5 per cent). It aims to invest in UK equities that reside in the bottom 10 per cent of the UK stock market in terms of market capitalisation.
The top-performing investment trust saw even higher returns over five years. The Chelverton Growth trust saw returns of £2,735 — 22.3 per cent annually — and has also seen strong returns over the past 12 months, returning £1,634 on an initial £1,000.
The trust, which is run by David Taylor and David Horner, interestingly invests only in Aim stocks (currently 60.3 per cent of its asset allocation) or Official List companies.