Investors with an appetite for risk can still find strong returns in uncertain times. An in the UK, where there is little clarity about how Brexit will play out, smaller companies are one way to access long-term growth.
Excellent stockpicking
Historic outperformance
Good diversification
High volatility
Smaller companies tend to be innovative and can adapt to changing circumstances. Darius McDermott, managing director of Chelsea Financial Services, says: "UK small-caps often outperform UK large-caps."
This outperformance can be seen over time. The average fund in the Investment Association (IA) UK All Companies sector returned 18.56 per cent, 35.43 per cent and 140.83 per cent over three, five and 10 years, respectively. By comparison, the average IA UK Smaller Companies fund returned 33.38 per cent, 54.92 per cent and 246.29 per cent over three, five and 10 years, respectively, as of 9 August.
One fund that can provide investors with UK small-cap exposure and has a strong record of outperformance is Marlborough UK Micro-Cap Growth (GB00B8F8YX59). The fund is managed by Giles Hargreave and Guy Feld, who are supported by a team of more than a dozen analysts. The managers aim to provide investors with a total return, from capital and income, in excess of that achieved by the FTSE Small Cap Index (excluding investment companies) over the medium to long term.
The fund is primarily invested in companies with a market capitalisation of £250m or less and a considerable proportion of the fund is in companies with a market cap below £150m. The managers look to invest in companies where the potential for growth is not yet reflected in the share price.
The investment process begins with the team using their views on the economy to filter out sectors and large numbers of stocks. They then take advantage of the lack of research on small-cap stocks to uncover hidden gems the market may have missed. They look for companies on the FTSE Aim, FTSE SmallCap, FTSE Fledgling and FTSE techMark indices.
They thoroughly research hundreds of companies and an integral part of that is meeting with company managements, often several times because the team believes a really good understanding of each company is needed to identify those that will be successful. Examples of companies the fund is invested in include AB Dynamics (ABDP), an automotive test system company, and IG Design Group (IGR:LSE), a designer, manufacturer and distributor of celebratory, stationery and gifting products.
The managers’ thorough stockpicking is reflected in the fund’s performance. It has consistently outperformed its benchmark, the IA UK Smaller Companies sector, returning 43.46 per cent, 72.28 per cent and 416.11 per cent over three, five and 10 years, respectively, as of 9 August. By comparison, the benchmark returned 33.38 per cent, 54.92 per cent and 246.29 per cent over three, five and 10 years, respectively.
The fund struggled amid last year's market volatility, falling 10.13 per cent in 2018. “This is because it’s an out and out growth fund and growth as a style was out of favour in the fourth quarter of last year,” says Mr McDermott. However it still fared better than the average IA UK Smaller Companies fund, which lost 11.7 per cent.
One of the biggest risks of this fund is its exposure to smaller companies. Many of these fail and go bust. There is also liquidity risk, because smaller companies can be difficult to trade in times of volatility.
But this fund is well diversified, so its performance is not too severely affected if some holdings do badly. It had 255 holdings at the end of June and even its largest positions rarely make up more than 2.5 per cent of assets. An when investing in a company for the first time, its managers invest less than 1 per cent of the fund's assets in it and increase their position as their faith in it grows.
So if you have a high risk appetite, Marlborough UK Micro-Cap Growth still seems like a well-managed way to go for growth. Buy. ZB
Marborough UK Micro-Cap Growth (GB00B8F8YX59)
| PRICE | 740.35p | MEAN RETURN | 15.39% |
| IA SECTOR | UK Smaller Companies | SHARPE RATIO | 1.24 |
| FUND TYPE | Unit trust | STANDARD DEVIATION | 11.19% |
| FUND SIZE | £1250.1m* | ONGOING CHARGE | 0.78* |
| No OF HOLDINGS | 255* | YIELD | 0.55% |
| SET UP DATE | 04/10/2004 | MORE DETAILS | www.marlboroughfunds.com |
| MANAGER START DATE | Giles Hargreave 04/10/2004, Guy Feld 01/02/2012 |
Source: Morningstar as at 09 August 2019, *Marlborough
Performance
| Fund/benchmark | 1 year total return (%) | 3 year cumulative total return (%) | 5 year cumulative total return (%) | 10 year cumulative total return (%) |
| Marlborough UK Micro-Cap Growth | -2.5 | 43.46 | 72.28 | 416.11 |
| IA UK Smaller Companies sector | -8.09 | 33.38 | 54.92 | 246.29 |
| FTSE Small Cap (ex investment trusts) | -10.94 | 10.92 | 29.24 | 166.39 |
Source: FE Analytics as at 09 August 2019
Top 10 holdings (%)
| AB Dynamics | 2.2 |
| Future | 2 |
| Imimobile | 1.9 |
| Games Workshop Group | 1.5 |
| IG Design Group | 1.5 |
| Next Fifteen Communications Group | 1.4 |
| Huntsworth | 1.4 |
| S4 Capital | 1.4 |
| RWS Holdings | 1.3 |
| Discoverie Group | 1.3 |
Source: Marlborough as at July 2019
Sector breakdown (%)
| Consumer discretionary | 22.9 |
| Technnology | 16.5 |
| Industrials | 15.2 |
| Financials | 12.2 |
| Healthcare | 9.2 |
| Non-classified | 6.4 |
| Basic Materials | 5.6 |
| Energy | 4.2 |
| Consumer staples | 2.6 |
| Cash and equivalents | 1.6 |
| Utilities | 1.4 |
| Telecommunications | 1.2 |
| Real Estate | 1 |
Source: Marlborough as at July 2019
