Interactive Investor

2015 Fund Awards: UK smaller companies

30th June 2015 12:43

Helen Pridham from interactive investor

Best larger fund

River & Mercantile UK Equity Smaller Companies

Taking our best UK smaller company fund for the second consecutive year is River & Mercantile UK Equity Smaller Companies. Over the three years to 31 March, the fund has returned 109% - more than double the 50% returned by the average fund in the UK smaller companies sector - making it the best-performing fund in the sector overall.

The Money Observer Rated Fund has been managed by Philip Rodrigs since September 2014. An old Investec colleague of the fund's former manager Daniel Hanbury, Rodrigs joined River & Mercantile (R&M) in March 2014 and was chosen to lead the firm's flagship smaller companies fund based on his extensive smaller companies experience.

This recent switchover in management would normally exclude a fund from our awards shortlist; however, River & Mercantile is more or less unique in that it takes a team-based approach to fund management, regularly rotating managers from one fund to another.

As Rodrigs explains, this rotation is made possible by the firm's common investment approach: "The performance of the fund is driven by the application of the R&M 'PVT' investment philosophy - which identifies companies based on a combination of three factors: the potential to generate significant shareholder returns (P), an attractive valuation (V) and optimal timing based on predictions that there will be a pick-up in the business (T)."

The portfolio has a larger exposure to much smaller UK companies, where strong growth and good returns is more visible. His top holding - logistics, manufacturing and staffing company Staffline - is an example.

With a market capitalisation of just £343 million, the Alternative Investment Market-listed company's share price has risen close to 30% in the year to 31 March. Staffline has benefited particularly from its exposure to the UK's domestic recovery.

Over the past year the manager says that his fifth-largest holding - OneSavings Bank - has also provided a strong boost to the portfolio. The manager currently runs a portfolio of 74 stocks. With low volatility for its sector, this a good choice for investors with a medium risk tolerance.

The 'A' share class was monitored for this award, with a three-year return of 108.5%. On Interactive Investor the fund's 'B' share class is available and returned 114.7%.

Best smaller fund

AXA Framlington UK Smaller Companies

Also winning its category for the second consecutive year is AXA Framlington UK Smaller Companies.

Launched in 2001, the fund has been managed by Henry Lowson since May 2012, delivering solid first-quartile returns. In the three years to 31 March the fund has returned 81% - 30% more than the UK smaller companies sector over the period.

Lowson runs a fairly well-diversified portfolio of over 80 stocks which, he says, limits stock-specific risks but also means that one stock's performance does not "make or break a year".

While he insists that he is a "stockpicker", the manager says that his investment process does involve "picking companies that are exposed to positive economic tailwinds"; these currently include "self-help, innovation, legislation and outsourcing".

Industrial companies are currently his largest sector weighting at over 36% of the fund, followed by services and financials at 15% each.

The fund's recent top performers have included healthcare outsourcing firm Synergy, whose share price skyrocketed in October last year following a bid from US medical equipment manufacturer Steris Corporation.

Promotional products manufacturer 4imprint - Lowson's top holding at over 2% of the portfolio - also enjoyed a strong year, with its share price rising close to 60% in the year to 31 March.

Over the next year, Lowson says he expects the UK equity market to continue to perform well, but based on different drivers: "It is our belief that over the next phase of this cycle, earnings growth will drive the market. A lack of analyst research means there are still plenty of opportunities to find undervalued smaller companies in the UK."

Moreover, Lowson expects the pick-up in merger and acquisition (M&A) activity seen last year to continue apace over the next 12 months, which, as recently seen with Synergy, can pay big dividends to early investors in the takeover target.

"M&A activity will continue to be a feature over the next year, alongside strong balance sheets and also better access to financing. I believe UK small company valuations remain attractive, both in absolute terms and indeed relative to their larger peers and other asset classes such as fixed income," says Lowson.

The 'Z' share class was monitored for this award, with a three-year return of 80.9%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.