The UK economy has been severely impacted by the coronavirus pandemic. On top of this, it leaves the European Union (EU) at the end of a transition period in January and there is a risk that this may be without a deal, so the country faces a very uncertain future. However, stocks do not necessarily follow the fate of the country they are listed in, particularly the types of large multi-nationals that are included in the FTSE 100 index, and there are many good companies of various sizes listed in London. Investing in the home market also eliminates some of the currency risk for end investors.
NEW ENTRANT: Slater Recovery (GB00B90KTC71)
Slater Recovery aims for growth by investing in companies that have low price/earnings ratios in relation to their earnings growth, and strong cash flows and financial positions. The fund’s investment team also looks for companies that trade at discounts to their net assets and cash, and what it considers to be recovery situations. But the team likes the companies it invests in to have strong balance sheets, powerful competitive positions and advantages, high returns on capital, and rising margins and sales per share.
They select holdings by examining company accounts and analysts’ forecasts, and place great emphasis on positive recent trading statements and directors’ share dealings. They meet companies’ senior managers to better understand their visibility of earnings and margins, and assess the opportunities and risks facing the businesses in the future.
They only invest in a company if it meets all their criteria. Slater Recovery is well diversified with around 60 holdings spread across various sectors.
The company that runs the fund, Slater Investments, specialises in UK equities. It was set up in 1994 by chairman and chief investment officer Mark Slater, and chief operating officer Ralph Baber. They define their investment approach as growth at a reasonable price because they do not believe that growth automatically means expensive, or that value is cheap and hopeless.
This approach has been highly successful, and the fund has made outstanding returns over the years relative to many other UK equity funds and broad UK indices such as the FTSE All-Share. Although the fund is small, with assets worth only about £95m at the end of July, this means it can invest in smaller companies.
Liontrust Special Situations (GB00BG0J2688)
Liontrust Special Situations has been managed since launch in November 2005 by Anthony Cross and co-manager Julian Fosh since 2008. They run the fund according to an investment process that involves identifying companies with intangible assets that produce barriers to competition and provide a durable competitive advantage. This allows the companies to fend off industry competition and sustain a higher than average level of profitability for longer than expected. Mr Cross and Mr Fosh think that the hardest characteristics for competitors to replicate are intellectual property, strong distribution channels and significant recurring business. Companies they invest in must have at least one of these attributes.
This process has resulted in an outstanding record of outperformance of the FTSE All-Share index and the fund is consistently in the top quartile of the Investment Association (IA) UK All Companies sector in terms of performance.
The managers invest the fund in companies of various sizes. At the end of July, it had 41 per cent of its assets in FTSE 100, 27 per cent in FTSE 250 and 20 per cent in Aim companies.
“The fund is typically very different to the UK stock market, with a significant underweight to large companies,” comment analysts at FundCalibre. “Much of the fund has traditionally been invested in small and mid-caps. It may also have large sector underweight or overweight positions. Despite these factors, the fund has exhibited lower volatility than the UK stock market due to Anthony Cross’s well-honed investment process.”
CFP SDL UK Buffettology (GB00BF0LDZ31)
CFP SDL UK Buffettology’s manager, Keith Ashworth-Lord, aims to replicate the investment philosophy of highly regarded US investor Warren Buffett. He typically holds 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. Mr Ashworth-Lord’s investment approach has resulted in the fund being less volatile than other funds invested in UK-listed shares while still producing high returns. This has been the case amid this year’s volatility, with the fund falling 7.11 per cent between the start of this year and mid August, in contrast to a fall of 17.56 per cent for the FTSE All-Share index and the IA UK All Companies’ sector average – a fall of 15.9 per cent.
Castlefield CFP SDL UK Buffettology has an outstanding record of consistently outperforming the FTSE All-Share index and IA UK All Companies fund sector average, so it is often among the top performing funds in this sector. 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.
MAN GLG Undervalued Assets (GB00BFH3NC99)
MAN GLG Undervalued Assets’ manager, Henry Dixon, invests via a value style process which he and his team have refined over 14 years, both on this fund and ones they ran previously. They 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. They look to mitigate risk by analysing companies’ balance sheets.
The fund invests in companies of various sizes and at the end of July had 46 per cent of its assets in FTSE 100 companies and 41 per cent in FTSE 250 companies.
As is the case with many funds that have a value style investment approach, at the end of July MAN GLG Undervalued Assets’ cumulative performance figures did not look good. However, this is in part attributable to the fund’s underperformance this year. In a number of other years since its launch in 2013 the fund has outperformed the FTSE All-Share index and IA UK All Companies sector average, in some instances by quite a margin.
Value style investing can undergo periods of underperformance and volatility, 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 – especially as it has exposure to smaller companies.
Merian UK Mid Cap (GB00B1XG9482)
Merian UK Mid Cap’s manager, Richard Watts, has run the fund since December 2008 and prioritises attractive returns across the entire business cycle by investing in 40 to 60 mainly UK-listed mid-sized companies. He looks for companies that seem to have the strongest growth potential and the greatest hidden value.
Merian Global Investors’ UK small and mid cap equities team believe that these types of companies are less well researched than large ones, resulting in share price inefficiencies. They take a flexible approach so are willing to hold value and/or growth stocks, depending on the conditions and outlook. They believe that this provides the greatest scope for sustained outperformance. They use external research and make their own detailed analysis to identify potential investments.
This strategy has resulted in a very good performance record, with Merian UK Mid Cap consistently outperforming the FTSE 250 index and IA UK All Companies sector average.
The company that manages the trust, Merian Global Investors, merged with Jupiter Fund Management (JUP) earlier this year. Although a number of Merian managers have left, Mr Watts, Merian UK Mid Cap’s deputy manager, Daniel Nickols, and the UK small and mid-cap team have joined Jupiter.
Neil Hermon has run Henderson Smaller Companies Investment Trust since 2002 and invests via a growth-at-a-reasonable-price (Garp) approach. He maintains a diversified portfolio, with 106 holdings at the end of July. Over a third of these were in industrials companies, with about 23 per cent in consumer and 20 per cent in financials companies.
Despite its name, the trust tends to have more of a focus on mid-caps rather than very small companies. This is because its investment universe for new purchases is stocks in the bottom 10 per cent of the UK stock market, in terms of size, but Mr Hermon tends to focus on the larger, more liquid stocks within this area. He also holds on to ones that do well and grow in size. So at the end of the trust’s last financial year on 31 May it had 61.2 per cent of its assets in FTSE 250, 3.7 per cent in FTSE 100, 16 per cent in FTSE Small Cap and 31 per cent in Aim stocks, according to Numis Securities.
The trust has outperformed the Numis Smaller Companies ex Investment Companies index in 15 out of 17 financial years, since Mr Hermon has been running it.
“Henderson Smaller Companies is one of the largest, most liquid UK smaller company trusts and an attractive core holding for investors seeking exposure to this asset class,” comment analysts at Numis. “Mr Hermon has a strong long-term track record, delivering NAV total returns over the past 10 years of 250 per cent or 13.3 per cent a year, versus 125 per cent or 8.4 per cent a year for the 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 2020, 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.
BlackRock Smaller Companies Trust has an excellent long-term record of beating its benchmark, the Numis Smaller Companies plus Aim ex Investment Companies index and many other UK smaller companies funds. But much of this is attributable to a previous manager, Mike Prentis, who stepped down in June last year.
Since then, the trust’s lead manager has been Roland Arnold, who had been a co-manager on the trust since April 2018. He is also an experienced smaller companies manager who worked with Mr Prentis on BlackRock’s UK small and mid-cap UK equity portfolios for 14 years, and he continues to be supported by BlackRock’s UK small- and mid-cap team.
They continue to run the trust along the lines that Mr Prentis did. BlackRock’s UK small and mid-cap team undertakes about 700 meetings with companies each year looking for growth companies that have the potential to become much larger. They favour high-quality, cash-generative companies with strong management teams that are able to generate their own growth regardless of the wider economic environment.
The trust is also different to some smaller companies funds in that it invests in Aim shares, which accounted for 46 per cent of its assets as of 31 July, according to Numis Securities.
Analysts at Winterflood say. “The trust is diversified, with more than 120 holdings, and there have been very few changes to its sector positioning, which is a result of stock selection. As a result of the investment approach and its emphasis on high-quality businesses, BlackRock Smaller Companies Trust could see periods of underperformance, particularly in the event of a cyclical/value-led recovery.”
But so far things seem to be going well. Over the year to 31 July the trust has outperformed the FTSE Small Cap ex investment companies and Numis Smaller Companies ex Investment Companies indices, as well as the average return for UK smaller companies investment trusts.
The trust’s board, meanwhile, is planning to amend its articles to enable it to pay dividends out of capital, although has no intention of making dividend distributions from capital at present as the trust has substantial revenue reserves.
SRI OPTION: ASI UK Ethical Equity (GB0004333059)
Aberdeen Standard Investments UK Ethical Equity has been managed by Lesley Duncan since 2004, and she aims for growth over five years or more by investing in stocks that meet a defined set of ethical criteria.
She avoids investing in companies that operate in areas including animal testing, weaponry, pornography and gambling services. And she looks to invest in companies whose business activities she thinks are making a positive contribution in terms of preserving the environment, or improving the quality and safety of human life. She invests in companies that she considers to have positive business practices and services in areas including human and labour rights, environmental safeguards, and action on bribery and corruption.
If an existing holding does not continue to meet the fund’s ethical criteria Ms Duncan and her team will divest of it. For example, the fund’s largest holding at the end of June was online retailer Boohoo (BOO), the share price of which plunged after allegations of poor worker practices in its UK supply chain. The fund sold out of the company at the beginning of July as Ms Duncan and her team felt that Boohoo’s response to the allegations was “inadequate in scope, timeliness and gravity”.
Although Ms Duncan and her team look to ensure the fund’s sector exposure and holdings are diversified, there are a number of FTSE All-Share stocks and sectors they cannot hold. But this has not been detrimental to performance – the fund has a good long-term record of beating the FTSE All-Share index and IA UK All Companies sector average.
But it is fairly volatile: although its longer-term cumulative returns are good, on a year-to -year basis it can swing from making very strong returns to steep negative returns. Part of the reason for this is because most of its assets are in mid-cap and smaller companies, so it is not an option for investors looking for something defensive or with low volatility.
|Fund/benchmark||1-year total return (%)||3-year cumulative total return (%)||5-year cumulative total return (%)||Ongoing charge plus any performance fee (%)||Morningstar Sustainability Rating|
|Liontrust Special Situations**||(0.9)||16.1||60.2||0.83||Above Average|
|Man GLG Undervalued Assets||(18.3)||(18.0)||6.4||0.90||Low|
|ASI UK Ethical Equity||(7.6)||(6.3)||15.2||0.85||High|
|Castlefield CFP SDL UK Buffetology**||1.4||30.6||86.8||1.19||Average|
|Merian UK Mid Cap||4.8||(3.7)||41.7||0.85||High|
|Henderson Smaller Companies Investment Trust||3.0||6.6||41.1||0.42*||Average|
|BlackRock Smaller Companies Trust||(0.3)||6.5||51.4||0.74*|
|FTSE All Share index||(12.6)||(8.2)||17.3|
|FTSE 250 Ex Investment Trust index||(9.3)||(7.7)||10.7|
|FTSE Small Cap Ex Investment Trust index||(7.2)||(15.4)||6.8|
Source: Morningstar, *AIC.
Performance data as at 31 August 2020.
**Data shown is for a different share class to the one indicated in the text
For all our selections across various sectors, see below: