Small caps have enjoyed a stellar run of late, both in absolute and relative terms and, with hopes pinned on more gains to come, multi-managers are continuing to hold their nerve.
The average UK Smaller Companies fund has soared by 36 per cent in the past 12 months – comfortably outpacing the mean return from the UK All-Companies sector of 27 per cent.
An obvious concern on the back of the strong run is for how long can the pace be maintained, especially when many company earnings have disappointed.
James de Bunsen, manager of the Henderson Multi Manager Income & Growth fund, says: “Small caps are by no means cheap relative to their own history, but a similarly lacklustre earnings story in large caps means that the relative valuation has not meaningfully changed. If the valuation story is mixed then so too are the fundamentals.
“The UK economy is one of the few developed markets to be experiencing meaningfully positive momentum and, given that small caps tend to have a domestic and cyclical bias, this is positive for small caps.”
He is backing the Paul Marriage and John Warren-run Cazenove UK Smaller Companies fund, which has returned 48 per cent in the past year. Mr de Bunsen says: “Not only are the pair talented stockpickers, but they are very strong on risk management, honed from also running a small-cap long/short strategy for many years. This blend has led to consistently strong outperformance.”
Elliot Farley, co-manager of the T. Bailey Growth fund, currently has a bias towards smaller companies in markets across most geographic regions. One of his top picks is Fidelity UK Smaller Companies. Managed by Alex Wright, it is 52 per cent up in 12 months. Mr Farley says: “He has proved himself to be an excellent stockpicker. The fund has soft-closed and he is taking on a significant additional role in also running Fidelity Special Situations, but we rate him very highly.”
Ben Kumar, investment manager at fund-of-fund specialist Seven Investment Management, says within the UK active manager space he rates Old Mutual UK Smaller Companies, which has achieved a 37 per cent return in the past year. “The management team has successfully kept a close eye on the risk of the fund delivering above-average risk-rated performance over the life of the fund. In the passive space, we access the FTSE 250 index through BlackRock Mid Cap UK Equity Tracker fund.”
For his part, JPMorgan’s Fusion fund-of-funds lead manager Tony Lanning believes the growth outlook for the UK remains favourable and has maintained a high-conviction stance in the British economy since his portfolios launched earlier this year. Across the Fusion range he has about 3-5 per cent in small caps, depending on the portfolio.
Previously, he was holding Artemis UK Smaller Companies and Aberforth UK Smaller Companies, but has since sold out of the former. Mr Lanning says: “Both are very good managers. We like the strong value bias of the Aberforth fund – it is a UK Small Cap specialist and its manager Andy Bamford is a very strict value-orientated investor.”
