UK Smid managers come back fighting after being tarred by Brexit and Covid sell-off

British equity funds with a small to medium market capitalization are at last experience a Moment in the sun afterwards Years of Brexit and more recently the Covid sell-off.

“Small cap has had bad luck over and over again over the past four or five years wrongly“Says Fairview Investing Advisor Ben Yearsley. "It was tarred with Brexit and then with Covid. ”

Investment Association statistics show investors have withdrawn a total of £ 392 million from funds of smaller UK companies over the past 12 months. While UK All Companies have funds suffered more extreme fits of redemption, shed £ 612m in February when the Covid crisis started and Another £ 1bn in June and July. The sector still has positive net flows of £ 555 million over the same period.

Though they are not loved by investors, Britain smaller Companies Funds have recovered much better than her Large-cap concentrated brothers as the market has bottomed out.

Samuel Meakin, associate director of equity fund strategies at Morningstar, lists the FTSE Small Cap ex Investment Trust Index slightly behind the FTSE All Share since the beginning of the year, by 18.2% compared to the decrease of 16.9%.

But When looking at funds, the opposite is true where tThe UK small cap category outperformed the UK large cap categoryy "and at a greater distance ”.

UK small cap is coming back and fighting

Portfolio advisor asked MorSince the beginning of the year, ningstar has been collecting data on the 20 best performing UK equity funds in all categories.

It found that 13 out of 20 funds, including nine from the top 10, had an explicit small-cap focuss. The Miton UK Smaller Businesses, led by Gervais Williams and Martin Turner, was the clear winner and scored an impressive 38.3%. over the period, twice as high as that second best performer MFM Techinvest Special situations that rose 19.2%.

In contrast only Three large-cap funds are among the strongest performers to date, as well as three Funds in Morningstar's UK Flex-Cap Equity category. Only one UK equity fund, Miton Multi-Cap Income, was among the top performers.

The best UK equity funds since the start of the year

Funds Morningstar category size Return ytd return 1 year
LF Miton UK Smaller Businesses UK small cap equity £ 67m 38.3

38.2

MFM Techinvest Special situations UK small cap equity

£ 6.7m 19.2 30.7
Octopus UK Micro Cap Growth UK small cap equity

£ 45.9m 6.9 18.2
Baillie Gifford British smaller company UK small cap equity

£ 186.9m 6.7 22.0
MFM Bowland UK small cap equity

£ 39.5m 3.8 14.4
Tosca Micro Cap UCITS Sterling Inst

UK small cap equity

£ 27.4m 2.5 6.8
SDL Free Spirit U.K small cap equity £ 21.6 million 2.2 18.1
ES R&M UK Equity Smaller Coms U.K small cap equity

£ 308.8m 1.2 14.8
Liontrust UK Smaller Businesses UK small cap equity

£ 1.1 billion 0.2 14.4
Marlborough UK Micro Cap Growth UK small cap equity

£ 1.1 billion 0.1 11.9
VT Sorbus vector UK small cap equity

£ 37.5 million (0.4) 13.5
BlackRock UK UK large cap equity

£ 510.2m (1.0) (0.6)
Baillie Gifford UK Equity Alpha UK Flex-Cap Equity

£ 622.5m (1.4) 9.2
BGF United Kingdom D4 UK large cap equity

£ 186.1m (1.5) (0.6)
Marlborough Nano Cap Growth UK small cap equity

£ 195.1m (1.6) 5.8
Royal London Sustainable Leaders UK large cap equity

£ 2.1 billion (1.8) 3.9
Marlborough Special Situations UK small cap equity

£ 1.2bn (2.2) 9.7
LF Miton UK Multi Cap income UK Equity Income £ 855.5m (3.3) 6.6
VT Castlebay UK Equity UK Flex-Cap Equity

n / A (3.5) 2.1
L&G growth UK Flex-Cap Equity £ 229.0m (3.5)

9.6
Source: Morningstar; Total return calculated by August 31, 2020

Lyxor ETF asset management latest active– –Passive navigator reportt shows that smaller businesses had better track records Navigating the markets affected by Covid in the first half of the year as their large-cap counterparts.

AHalf (53%) of EU-based active equity funds outperformed their respective benchmarks minus fees in H1. But if you actively look at it smaller Companies Fund isolated, the average outperformance rose to 70%. UK Small C.ap had the highest hit rate of all equity funds with 76%, followed by Europe Small Cap with 75%.

UK Smid is less affected by energy companies and banks destroyed by Covid

"Part of that performance will be due to who these funds have not been exposed to compared to what they are“Says Willis Owen, Head of Personal Investing Adrian Lowcock.

“By having either little or no exposure to large corporations, they avoided some of the main areas hit by the Covid-19 crisis, such as oil, airlines and travel companies.

"While S.medium funds can invest in these areas; such funds are usually well diversified in order to reduce the risk of investing in scenter Companies and most managers in this field tend to focus on growth over value.

Andrew Vaughan, manager of SDL Free Spirit (pictured), said Portfolio advisor He avoids energy companies and finance altogether. Its £ 21.6m fund, which is part of the UK's All Companies Sector of the Investment Association, returned 2.2% compared to the sector's 17% losses and is the best performing fund since the start of the year .

One third of Vaughan's portfolio at the end of August was in companies with market capitalizations between £ 100m and £ 500m compared to 18.8% in Businesses valued at £ 5 billion and more.

Top UK multi-cap funds taking advantage of Smid Bias

The next best funds in the IA UK All Companies sector – the Marlborough Multi-Cap Fund and the Baillie Gifford UK Equity Focus Fund – also tend towards small and mid-cap companies.

Richard Halletts Marlborough Multi-Cap Growth Fund, that exceeded the industry average by 17.8%, had 38.3% in medium-sized companies and 11.1% for small caps at the end of August compared with 21.6% and 25.1% for large caps and mega caps.

Baillie Gifford does not provide a capitalization breakdown for its funds, but the fund's investment objective is to focus on small and medium-sized companies.

Director of Marketing and Sales says James Budden Managers are more interested in companies' growth prospects than their size when looking for UK stocks.

"Some small and medium-sized businesses might fit in Invoice, But they must have the potential to grow over time"Explains Budden. "Rightmove, Ocado and Hargreaves Lansdown all started small and made it big. But the truth is that the majority of small businesses stay small for a reason, and it's not our style to get on and off with them on the grounds of valuation. "

Vaughan says he found opportunities across the market cap spectrum and expanded existing positions in FTSE 250 defense company Avon Rubber and FTSE 100 software company Aveva and its stake in Flavor and fragrance supplier Treatt, which is in the FTSE Small Cap Index.

Technology and video game development

Many of the top performing managers this year have looked at technology trends and trends in stocks that are underrepresented in more mature indices like the FTSE 100.

Rathbones UK Opportunities manager Alexandra Jackson, whose fund is also top quartile during the Covid period, currently has a 20% weight in UK tech.

Cainoswho provides software and advisory services to the UK government, is one of their top performers since the beginning of the year with shares by 30% As was the video game company Team 17, whose shares rose 80% during the lockout period. They are currently the second and third largest holdings in Jackson's portfolio with 3.3% and 2.9% respectively.

“People sometimes see the UK market as a bit quiet and without that really brilliant kinds of companies that the US is full of, ”she says. "But tThere's a lot of tech here in the UK, it is just not in the FTSE yet. "

Hallett's top performers include Aim-listed Gamma Communications, which offers corporate communications, mobile and connectivity services, and animal genetics company Genus.

Hallett says he took part in several fundraising drives for midsize digital companies over the summer, including online payment company Network International and Martin Sorrell's newest company, S4 Capital, in which he was involved at the time of its placement in July.

"There have been a number of fundraisers from companies that meet our exacting criteria and have raised money not because they need it to weather the storm, but because they want to win over competitors and strengthen their competitive position," he says. “That created a number of interesting opportunities and we were happy to support several of these placements. "



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