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Small-cap fund managers bank on repeat success

Small-cap fund managers bank on repeat success

If you placed your faith in UK smaller companies a decade ago you are likely to be reaping the rewards of such a shrewd decision. 

A return of 313.9 per cent in the FTSE Small Cap index over the past 10 years is not too shabby, based on total returns data from FE Analytics for the 10 years to February 22 2019 – almost double the 168.9 per cent rise in the FTSE 100 index over the same period.

Having the right manager is clearly important for all active funds – but with a sector like UK small-caps it is essential.

What the LF Tellworth UK Smaller Companies fund has in the shape of Paul Marriage and John Warren is two very experienced managers with proven track records.

Mr Marriage managed the very successful Cazenove Smaller Companies fund (later renamed Schroder UK Dynamic Smaller Companies) from January 2006 to August 2017.

Mr Warren became co-manager in September 2010. From September 2010 and until their departure in July 2017 the fund returned 251.88 per cent, according to FE Analytics, based on total returns in sterling from September 6 2010 to July 31 2017.

Launched in November 2018, this new fund is a true smaller companies fund: it does not invest in micro-caps or mid-caps, like some of its peers. 

Despite being a new offering, investors can take comfort that the tried and tested process the managers have previously used remains in place. They avoid high-risk areas such as oil and gas, biotech or mining, and then use a number of different quantitative screens to eliminate other businesses, including companies with aggressive accounting or poor corporate governance.

Typically, the team end up with an investable universe of 600 stocks to choose from.

Meeting companies is a key part of the process and the managers will target those with a differentiated product, high sustainable margins, management aligned with shareholders and a market leading position. This type of company will make up 75 per cent of the portfolio.

The remaining 25 per cent will be made up of value opportunities, such as self-help stories enjoying a turnaround, or misunderstood businesses. 

Overall, the fund managers want to build a portfolio of 40 to 60 positions with a three-year typical holding period.

The only slight negative is the annual management charge, which is 0.85 per cent and on the expensive side. The fund is capacity-constrained, meaning they will close it to new investments before it gets too big. But I think this is a good thing.

Mr Marriage and Mr Warren have an outstanding long-term track record investing in smaller companies and I have high hopes that they can repeat their past success with this new venture.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre