Small company funds could be an excellent way to ride any recovery in the stock market. We look at a few contenders.
To say the small cap sector is down in the dumps at the moment would be somewhat of an understatement. Many private investors in the UK prefer to invest in smaller companies and have suffered badly this year.
However, when the stock market recovery does come round, many small company shares will bounce back strongly. Typically, small caps tend to recover a little bit later than larger companies. Institutions tend to buy larger, more liquid companies first and only when bargains become harder to find do they delve deeper into the lower reaches of the market.
As well as buying individual shares, another way of profiting could be by buying a small company fund. Here I’m going to look at a few investment trusts that specialise in UK smaller companies that are worthy of closer inspection.
Some special situations...
Let’s start with a couple of the poorest performers where the native shareholders are getting a little restless. A few weeks ago I looked at Eaglet (LSE: EIN) which is in the process of turning itself into a fund that follows directors’ dealings. It’s unclear at the moment whether it will still retain its focus on smaller companies but it’s a fund to watch nonetheless.
Another fund where corporate shenanigans are afoot is Henderson Smaller Companies (LSE: HSL). It’s still one of the largest funds in this sector despite the fact it’s lost three-quarters of its value over last eighteen months and has slumped to a discount of 35%. It’s also one of the oldest having been formed in 1887.
Now Carrousel Capital, which owns around 7% of this fund, has submitted a proposal that could see quarterly redemptions made to shareholders at a small discount to asset value. This won’t be put to shareholders until next September, when the next AGM is held, but whatever the outcome it could help spark a turnaround in the fund’s fortunes.
... and consistent performers
Three funds in the UK smaller companies sector were highlighted recently in a report that looked at the twenty most consistent investment trusts over the last ten years. The key measure was how many discrete years over the last decade did each fund beat its sector average.
BlackRock Smaller Companies (LSE: BRSC) came out top in this sector outperforming in 8 out of 10 years. It was followed by Invesco English & International (LSE: IEI) and Montanaro Smaller Companies (LSE: MTU), both which managed 7 out of 10. These consistency figures are probably more meaningful for the latter two funds as their managers have been in situ since 1991 and 1995 respectively whereas BlackRock saw a change of manager in 2002.
You might think that funds that demonstrated this sort of consistency would also be among the top performers in the sector. In fact, over the last ten years, there are mostly mid-table. Indeed, Invesco Perpetual UK Smaller Companies (LSE: IPU) has been a better bet than its sister fund English & International having outperformed it over 1,3,5 and 10 years.
To finish, let’s look at some of the top performers of recent years. There’s no guarantee they’ll be able to continue their success but they are certainly worth considering.
Two Gartmore funds overseen by Gervais Williams have among the best long-term records in the sector. Williams has run Gartmore Growth Opportunities (LSE: GGOR) since 1993. Although it has a high total expense ratio of 2%, it has held up well compared to most other small cap funds in the last year by partially insuring itself against a drop in the overall market using options on the FTSE 100.
Williams took over at Gartmore Fledging (LSE: GMF) a little more recently in 2001. This fund has a narrower focus and passively tracks the FTSE Fledging index with two-thirds of its portfolio. Yet it still has the sector’s best ten-year record even though it has lost almost half of its value over the last year.
If you’re looking for small cap fund on a hot streak then the best performer over the last five years is Standard Life UK Smaller Companies (LSE: SLS). Prior to Harry Nimmo taking charge in 2003 this fund was a very poor performer. But Nimmo has worked wonders, replicating the success he has had running the unit trust version of this fund since 1997. It’s still one of the smallest funds in the sector though with assets of just over £30m. This could work to its advantage as it will find it easier to build up meaningful stakes in the best recovery opportunities.
You can buy shares in small companies and investment trusts using the Motley Fool’s Share Dealing Service.