Top 100 Funds 2019: UK equity growth

Liontrust Special Situations (GB00BG0J2688)

Liontrust Special Situations is in the top quartile of the IA UK All Companies sector in terms of performance over one, three five and 10 years, and has a superb record of outperforming the FTSE All-Share index.

Its longstanding managers, Anthony Cross and Julian Fosh, can invest in companies listed in the UK and Ireland, regardless of their size or sector. The fund was mainly invested in FTSE 100 and FTSE 250 shares at the end of June, but also had 16.4 per cent of its assets in Aim shares, which means it could be more volatile than funds focused on large caps. 

The fund’s managers look to invest in companies with a durable competitive advantage that allows them to defy industry competition and sustain a higher-than-average level of profitability for longer than expected.

“This is a great fund managed by very experienced and stable managers,” says Mr Seager-Scott. “They look through much of the short-term noise to find high-quality companies with a clear economic advantage that can thrive, and add material value over the medium and long term by focusing on robust cash flows.”

MAN GLG Undervalued Assets (GB00BFH3NC99)

Since its launch in 2013, MAN GLG Undervalued Assets Fund’s annual returns have been volatile, but its longer-term cumulative returns are good: the fund has beaten the FTSE All-Share index and the IA UK All Companies sector average over three years and five years. This is in part due to the value investment style its managers follow, which can undergo periods of underperformance. Value investing involves buying equities of which the prices seem lower than you think they should be and waiting for them to improve.

The fund’s manager, Henry Dixon, has refined its investment strategy for over a decade. He and co-manager Jack Barrat seek companies with strong cash and asset characteristics that are unloved by the market, and aim to construct a portfolio that is better value than the broader market. They like companies of which the estimated replacement cost exceeds the market value and which are priced below their estimated intrinsic value as defined by earnings.

“I hold Henry Dixon and Jack Barrat, and the high conviction, contrarian investment approach they follow, in high regard,” says Mr Morgan. “They are also willing to invest in medium and smaller companies.

At the end of July, the fund had nearly 40 per cent of its assets in small and mid caps that have the potential to make greater returns than larger companies, but are potentially more volatile. So if you invest in this fund you should be prepared to hold it for five years or preferably longer and have a high-risk appetite.

Castlefield CFP SDL UK Buffettology (GB00BF0LDZ31)

Castlefield CFP SDL UK Buffettology has an outstanding record of consistently outperforming the FTSE All-Share index and IA UK All Companies sector, and is in the top quartile of the latter over one, three and five years.

Its manager, Keith Ashworth Lord, aims to replicate the investment philosophy of highly regarded US investor Warren Buffett, by holding 25 to 35 companies that have enduring operating franchises, high returns on equity, strong free cash flow and experienced management teams. His investment decisions are based on analysis of companies, free from adherence to industry sectors or stock limits.

A downside of Castlefield CFP SDL UK Buffettology is its relatively high ongoing charge of 1.19 per cent, but its strong, consistent outperformance more than compensates for this.

Merian UK Mid Cap (GB00B1XG9482)

Old Mutual UK Mid Cap has outperformed the FTSE 250 index and the IA UK All Companies sector average over three, five and 10 years, putting it in the top quartile of its fund sector over those periods. Its manager, Richard Watts, takes a flexible approach, prioritising attractive returns across the entire business cycle by investing in about 40 to 60 primarily UK-listed mid-sized companies. He looks for companies that seem to have the strongest growth potential and the greatest hidden value.

Henderson Smaller Companies Investment Trust (HSL)

Henderson Smaller Companies Investment Trust has a very strong performance record under manager Neil Hermon, who has run it since 2002, with its net asset value returns beating Numis Smaller Companies ex Investment Companies index in 14 out of its past 16 financial years. Despite its name, the trust tends to have a substantial allocation to mid caps, and has also outperformed the FTSE 250 index over longer periods.

“The trust’s universe for new purchases is stocks in the bottom 10 per cent of the UK stock market,” comment analysts at Numis Securities. “Neil Hermon tends to focus on the larger more liquid stocks in this universe and is willing to hold onto the winners. As a result, 62 per cent of the portfolio [at time of writing] is in FTSE 250 stocks, with the remainder split between FTSE Small Cap (21 per cent) and Aim stocks (25 per cent). Neil Hermon has built up a strong long-term track record by building a diversified portfolio with a focus on growth at a reasonable price, delivering net asset value total returns over the last 10 years of 416 per cent, or 17.8 per cent a year on average, versus 225 per cent, or 12.5 per cent a year on average for Numis Smaller Companies ex Investment Companies index.”

Henderson Smaller Companies has a performance fee on top of its management fee. However, its ongoing charge is very low, so even in years when its performance fee is triggered it doesn’t add up to unreasonable amounts. For example, in its financial year ended 31 May 2018, the ongoing charge of 0.42 per cent plus the performance fee amounted to 0.99 per cent. And in its financial year to 31 May 2019, the performance fee was not triggered, so its ongoing charge only came to 0.42 per cent. The trust has a limit on the total management and performance fees payable in any one year of 0.9 per cent of the average value of the trust’s net assets during the given year.

Although Henderson Smaller Companies Investment Trust aims to maximise total returns rather than being an income fund, it has increased its dividend for 16 consecutive years.

BlackRock Smaller Companies Trust (BRSC)

BlackRock Smaller Companies Trust has an excellent record of beating its benchmark, Numis Smaller Companies plus Aim ex Investment Companies index and many other UK smaller companies funds. But in June Mike Prentis, who had been manager of the fund since 2002, stepped down.

While this is not good news for investors, the trust continues to be run by an experienced manager and team. The new lead manager, Roland Arnold, had been a co-manager on the trust since April 2018 and is an experienced smaller companies manager who has worked with Mr Prentis on BlackRock’s UK small and mid-cap UK equity portfolios for 14 years. He continues to be supported by BlackRock’s well-resourced UK small- and mid-cap team.

Most of the panel did not suggest removing it because of the manager change.

“We do not expect significant changes to the investment approach, given that the team will continue to use the same approach focusing on quality growth bias, characterised by strong balance sheets and proven management teams,” comment analysts at Numis Securities. “Over the past year, since Roland Arnold has been co-manager, the portfolio has become more concentrated, reflecting his style. He is an experienced manager who [also runs a number of] open-ended funds.”

We will monitor the trust to see how it performs following Mr Prentis’s departure.

FUNDS DROPPED

Marlborough UK Micro Cap Growth (GB00B8F8YX59)

Marlborough UK Micro Cap Growth has an outstanding record of beating the FTSE Small Cap index and IA UK Smaller Companies sector average. The fund targets companies with a market capitalisation of £250m or less at the time of purchase, and a considerable proportion of it tends to be invested in companies with a market capitalisation of less than £150m at the time of purchase. However, due to its success it has now grown to a size of over £1.2bn, which can make it harder to invest in smaller companies. When a fund becomes larger in size, if it takes a meaningful sized position in a small company it might end up owning a very large stake in it. So managers of relatively large funds tend to avoid very small companies, which in some cases can mean a smaller choice of investments than previously, missing out on some successful companies and the fund not performing as well in future.

A number of the panel felt that although Marlborough UK Micro Cap Growth and its managers’ performance has been excellent, the size is an issue.

“This fund has been a fantastic long-term performer,” says Mr Gilligan. “However, it now has assets under management of over £1.2bn This is a far from optimal size for a fund focused on stocks with a market capitalisation of less than £250m.”

As with other funds removed from the list we are not suggesting existing investors sell their stakes in it. But before committing new money to this fund it could be worth considering if there is one that looks like a better way to get exposure to very small companies.