The little-known fund leading the UK All Companies sector
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The UK All Companies sector is one of the most competitive areas of the market with over 250 funds competing for investors’ money. It is home to many well-known investment providers and fund managers, but there are also a few hidden gems that can provide impressive performance without attracting much attention.
A prime example is the Chelverton UK Equity Growth fund, which is the top ranked product in the sector over the period since it was launched in October 2014. During that time it has returned 122%, which is well ahead of the sector average of 47%, yet it still only has £274 million of assets under management out of the £181.9 billion in the sector as a whole.
Cash-rich businesses that are capable of funding their own growth
The fund invests in a mixture of small and medium sized UK companies with the managers targeting cash-rich businesses that are capable of funding their own growth. It has recently been awarded an Elite Rating by FundCalibre in recognition of its ability to outperform its more illustrious peers.
Chelverton is a boutique asset manager that was founded in 1998 and specialises in small and mid-cap UK companies. Its UK Equity Growth fund is managed by James Baker, who is highly experienced in this area of the market.
Baker and his team use an initial screening process to scan all the London-listed stocks outside of the blue chips of the FTSE 100 index. This is designed to identify growing businesses with high profit margins that have plenty of cash on their balance sheets including those traded on AIM.
The screen highlights around 250 potential candidates that are then analysed to assess the predictability of the revenues, the sustainability of the margins and the quality of the management teams. It is then a case of deciding whether the shares are undervalued.
Majority of the money invested in stocks worth less than £500 million
The fund will normally have around 50 to 70 different holdings, but at the end of July there were a total of 100, with the majority of the money invested in stocks worth less than £500 million. None of these companies accounted for more than 2% of the portfolio, with the 20 largest positions making up just a third of the fund.
Baker’s largest sector weighting is Technology at 23.9% of the portfolio, with the largest holdings in this area being: CentralNic, a global domain name registry; Castleton Technology, which designs social housing software; and Quixant, the gaming platform provider.
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Another area that is heavily represented is Industrials with names such as Strix, which makes kettle controls; the global engineering company, Morgan Advanced Materials; and the industrial thread manufacturer, Coats Group.
Small and mid-cap stocks can be higher risk than the large blue chips, but to some extent this is mitigated by the manager’s focus on profitable, cash-rich businesses. The emphasis on strong recurring revenues also makes the portfolio less vulnerable to changes in the economic cycle.
Chelverton UK Equity Growth is a truly active fund with a clear and disciplined investment process. It has delivered an exceptional performance since it launched almost four years ago and there is no reason to suppose that it can’t continue to beat many of its better known peers.
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