With any investment it is important to get under the bonnet to understand how and why it performs the way it does. This allows an investor to predict how it will perform under certain market conditions and reduces the chance of a nasty surprise.
The IA UK Smaller Companies sector has performed well over the past five years. However, the performance of individual funds in this higher-risk sector has varied. Take the Artemis UK Smaller Companies Fund, managed by Mark Niznik. The manager's tenure began in October 2007 and over this time, the fund has risen 49.5% compared with 79.6% for the IA UK Smaller Companies sector and 94%* for the Numis Smaller Companies (-InvTrust) Index.
|Annual percentage growth|
| Jan 11 -
| Jan 12 -
| Jan 13 -
| Jan 14 -
| Jan 15 -
|Artemis UK Smaller Companies||1.83%||23.8%||29.94%||-4.29%||18.25%|
|IA UK Smaller Companies||-8.65%||23.79%||35.71%||-1.66%||13.58%|
|Numis Smaller Companies (-InvTrust)||-6.8%||28.64%||35.37%||-2.01%||9.23%|
Past performance is not a guide to future returns. Source: Lipper IM* to 04/01/2016.
The smaller companies universe from which managers can invest ranges from very small companies up to medium-sized firms. Over the past five years, companies at the higher end of this range have outperformed those at the lower. Therefore, the underperformance of the Artemis UK Smaller Companies Fund relative to the Numis Smaller Companies Index, which is predominately composed of medium-sized companies, can be attributed to a bias to very small companies.
Our view on this fund
The manager has the flexibility to move into medium-sized companies and his decision to remain heavily invested in smaller companies has hurt the fund’s performance. There are managers featured on the Wealth 150 list of our favourite funds across the major sectors that made a similar decision. However, over the past few years our favoured managers have outperformed the Artemis UK Smaller Companies Fund and the IA UK Smaller Companies sector by some margin as a result of superior stock selection. According to our analysis, Mark Niznik has in aggregate added very little value through his stock selection, and detracted value through his poor positioning in terms of the size of company the fund invests in.
As the manager relies on his stock selection to add value for investors, we would expect to see greater value added in this area. The UK Smaller Companies sector is highly competitive and at present we feel there are superior alternatives to the Artemis UK Smaller Companies Fund. It therefore does not feature on the Wealth 150.
The manager's current outlook
Companies which are capable of growing organically (i.e. without taking-over other companies) are few and far between and have performed well over the past year, according to the manager. As such, he has taken profits from these companies and reinvested the proceeds into undervalued companies elsewhere. This includes investments such as Hargreaves Services, which he has recently added to as he feels their Scottish mining pits have been undervalued.