Smaller companies have had a strong run since the end of the financial crisis, but encountered a tougher time over the past year. Investors became concerned share prices had risen too far to justify the growth prospects of smaller companies, while a combination of global issues such as the Ebola outbreak, conflict in Russia and Ukraine, and the falling oil price, also had a negative impact.
Ken Hsia was the supporting manager of the Investec UK Smaller Companies Fund from 2005 and took over the role of lead manager in January 2014. He has continued to run the fund using the same approach as the previous lead manager, seeking high-quality businesses with strong management teams and a history of generating value for shareholders. He focuses on those he believes are currently undervalued but with improving business prospects and increasing investor attention.
The fund can invest in companies between £30 million and £1 billion in size with the majority of the portfolio currently concentrated on those between £100 million and £500 million. To put this in context, BP and HSBC, which are in the FTSE 100 and not held within the fund, both exceed £80 billion.
Over his tenure as lead manager, the fund has lost 4.3%, underperforming the Numis Smaller Companies plus AIM (ex.IT) index by 0.1%* and the IA UK Smaller Companies peer group by 2.8%, although this is not a guide to the fund's future performance. Avoidance of highly-valued defensive areas such as healthcare negatively impacted returns as they performed strongly throughout the period.
Elsewhere, the fund benefitted from only a small exposure to companies within the oil & gas and basic materials sectors which have experienced a torrid year. Good performance from some of the fund's larger holdings such as Plus500 and Entertainment One also contributed positively to returns. The fund can operate a concentrated portfolio which allows each holding to make a significant impact on returns but is a higher-risk approach; the fund currently holds around 80 stocks. In addition the fund has the flexibility to use derivatives, should they see fit which adds risk.
Performance of the Investec UK Smaller Companies Fund over manager's tenure
Past performance is not a guide to future returns. Lipper IM* to 02/03/2015
|Annual percentage growth|
| Mar 10 -
| Mar 11 -
| Mar 12 -
| Mar 13 -
| Mar 14 -
|Investec UK Smaller Companies||50.21%||6.00%||17.45%||48.26%||-7.50%|
|IA UK Smaller Companies||33.91%||0.95%||17.81%||31.47%||-2.55%|
|Numis Smaller Companies plusAIM ex InvTrust||30.54%||-0.59%||14.31%||25.42%||-4.81%|
Our view on this fund
The share prices of smaller companies can be more volatile than their larger counterparts and investing in this area requires a long-term horizon. The UK Smaller Companies sector is very competitive and home to many excellent managers. Over the short period Ken Hsia has been managing the fund, our analysis suggests while the sector positioning of the fund has had a positive impact, stock selection has detracted from returns. We would like to monitor his performance over a longer period before considering the fund for inclusion in the Wealth 150 list of our favoured funds across the major sectors.