There’s always an allure to knowing about the best things before anyone else does. Whether it’s a new restaurant, a hot holiday destination or, in my case, a ‘hidden’ investment opportunity, one the most appealing parts of the experience is then being able to share this knowledge with your friends.
So as we swing into ISA season, I wanted to call your attention to five funds that I think are hidden gems in the investing world. These funds are all still quite small—each has less than £120m under management1—and have delivered strong returns for their investors in recent years.
While there are of course many excellent large funds, small funds do have a few advantages. For one thing, they can be more nimble in the way they invest and the speed with which they can buy or sell stocks as opportunities arise. It is also easier for smaller funds to differentiate themselves from the benchmark, because they may not have the same liquidity challenges that the bigger funds sometimes face, which forces them into the larger stocks.
Here are five of my favourites.
1. Mirabaud Equities Europe Ex-UK Small and Mid – £31.1m
This is a newer fund, but it is run by the highly experienced Ken Nicholson, who previously managed the Standard Life Investments European Smaller Companies fund for several years. Ken has historically strongly outperformed his peer group and he has taken the same process from the Standard Life fund across to his new fund at Mirabaud. He believes on getting out on the road to find the companies that other managers may not, and so in a way this is a hidden gem fund full of hidden gem companies.
2. Wood Street Microcap – £64.2m
Small funds can be especially strong performers in the small-cap market, as some of these smaller companies simply don’t have the capacity to accept investments from the larger funds. A fund such as the Wood Street Microcap can be highly concentrated and it has around 40 holdings – typically in companies that the manager, Ken Wotton, believes can double their earnings over a five-year period. Ken steers clear of sectors like oil and mining though, which helps him to avoid some of the riskier penny stocks. In the past three years, the fund has returned 32.5% versus the smaller company index’s 20.5%2.
3. T. Rowe Price European Smaller Companies – £67.1m
With the European stock market still a bit of a mixed bag, a smaller companies fund that focuses on fundamental stock selection rather than broader economic trends might be a good way to go. This little gem is run by a high quality manager and a specialist smaller companies team, who are not afraid to be quite different to their benchmark and will look for unloved companies at good prices. Over the three years to start of February, the fund is up 43% and the MSCI Europe Small Cap index 39%3.
4. SVS Church House Tenax Absolute Return Strategies – £78m
Rather than focus on beating the market, this is a targeted absolute return fund that aims to deliver a positive return in all market conditions over rolling 12-month periods. A key goal is that it is also significantly less volatile than the market – something it has comfortably achieved since launch. It holds diverse assets including equities, bonds, property, alternatives and cash. I particularly like that managers James Mahon and Jeremy Wharton look for low correlation between their assets, however, as this is essentially what is at the crux of a successful absolute return strategy.
5. R&M UK Equity Long Term Recovery – £111m
Manager Hugh Sergeant is a value investor, meaning he buys stocks when they are cheap, in companies that he thinks have suffered a setback but whose long-term growth potential is strong. This style was out-of-fashion prior to 2016; however, a slight shift in the global economic climate last year and the US now raising interest rates has seen value stocks start to outperform. As such, this fund was one of the top performers among the IA UK All Companies sector in 2016 and in the 12 months to start of February, it has returned 42% to the UK stock market’s 26%4.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
1 Fund assets under management data from FE Analytics, correct as at 31/12/2016
2 FE Analytics, Livingbridge Wood Street Microcap vs Numis Smaller Companies (ex Its), TR in GBP, 07/02/2014–07/02/2017
3 FE Analytics, T. Rowe Price European Smaller Companies vs MSCI Europe Small Cap, TR in GBP, 07/02/2014–07/02/2017
4 FE Analytics, R&M UK Equity Long Term Recovery vs FTSe All Share, TR in GBP, 01/01/2016–31/12/2016