For much of last year, the uncertainty surrounding Brexit weighed heavily on the performance of UK smaller companies. Being more domestically focused, the depreciation in sterling following the referendum led to a fall in revenues.
The sector also witnessed a large-scale sell-off straight after the vote, thanks to jitters about holding any UK-focused investments, further adding to it underperformance.
However, as the post-Brexit dust settles and focus returns to global geo-political issues, small-caps have been steadily gaining ground. The sector has returned 9.3 per cent in the year to end of June, compared to the FTSE All Share’s 5.5 per cent.
The Old Mutual UK Smaller Companies Focus fund, managed by Nick Williamson, has been a top-performer, ranking in the first quartile over one, three, five and 10-years.
The fund aims to outperform in all economic phases, so Williamson buys into the businesses he thinks will do well in the current environment. As well as analysing a company’s business model, strategy and finances, he takes into account the wider macro picture.
The team also generates ideas from monthly economic strategy meetings with the large-cap equity and bond teams at Old Mutual. They are prepared to pay a higher price for stocks if they think they are justified by future growth.
Williamson wants to ensure that stock selection is paramount, with industry selection a less important driver than in the past. In 2015, it was mainly the larger stocks that drove performance, while tiny companies helped the fund do well the year after.
Since taking over, Williamson has reduced the number of stocks in the fund (there are currently 52 holdings). This means the individual performance of such stocks is significantly more important to returns. FE’s Research team feel that this strategy offers greater potential for outperformance. However, there is also the possibility for underperformance if any stock has a poor period.
Williamson has used the small size of the fund to buy much smaller companies, adding a number of holdings with a sub-£100m market cap. Overall, this is a high-risk way to access smaller companies, so investors should be prepared for significant price swings. This fund is best suited to those with a long-time horizon who want to maximise their ability to make money by using a more aggressive strategy.
The fund has an OCF of 0.88 per cent and has an FE Risk Score of around 94 currently (zero being cash and the FTSE 100 being 100). It is also part of FE’s acclaimed Approved List.
Namrata Nanda is institutional marketing manager at FE
Sector: NUMIS Smaller Companies (ex ITs) Index
Benchmark: FTSE All Share
AUM: £272.2m as at 30/06/2017
Launch Date: 14/01/2002
Management: Nick Williamson
FE Alpha Manager rated: No
FE Crown Fund Rating: Five