Smaller companies funds are generally considered to be higher risk than their large cap counterparts, but during the recent market sell-off the sector has held up better than you might imagine. This is because these sorts of businesses are more reliant on the UK economy and less susceptible to the slowdown in China and the impact that it could have on other parts of the world.
The average UK Smaller Companies fund has fallen by 0.7% in the last three months, whereas the UK All Companies sector is down 8.3%. They also have a better longer term record with a 5-year return of 105.9%, which is well ahead of the 55.7% from their larger rivals.
There are 51 open ended funds in the sector with two of the most resilient during the last three months being Standard Life Investments UK Smaller Companies and Marlborough UK Micro Cap Growth. Both have risen by around 3% over the period.
Harry Nimmo’s £1.1 billion Standard Life fund has delivered top quartile performance over the last 12 months, although longer-term it has not been as impressive. The manager has put together a highly concentrated portfolio of 57 holdings with almost 60% of the assets invested in the mid-cap stocks of the FTSE 250.
Marlborough UK Micro Cap Growth is run by Giles Hargreave, another well-known and respected small cap manager. The fund has £465 million of assets under management and is much more diversified with the money allocated between 247 different stocks. It is a top quartile performer over the last decade, but has lagged behind during the last 12 months.
Four funds in the sector have returned more than 170% over five years with the best known of them being Fidelity UK Smaller Companies. The manager looks for cheap, unloved stocks where there is a catalyst for change, with the strategy generating an average annualised return of 20% per annum since it was launched in February 2008.
There are only 18 closed-ended smaller companies funds, but on average they have held up better than their open-ended counterparts over the last three months and have delivered the stronger long-term performance.
A good example is the Henderson Smaller Companies Investment Trust (HSL), which is up 193.2% over five years and is trading on an 11% discount to NAV. Neil Hermon, the manager, has invested the net assets of £561 million across 113 different holdings with the portfolio yielding just over 2%.
All of these smaller companies funds have held up remarkably well in the last few months and have generated strong long-term performance, but they would be vulnerable if the sell-off were to trigger more widespread investor panic.