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Investment trusts vs funds: UK Smaller Companies

Jonathon Curtis takes a look at funds and investment trusts investing in the UK smaller companies sector.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

There’s one sector above all others where we think fund managers have the best opportunity to beat their benchmark – UK smaller companies. They have more room to grow than larger companies, and with fewer investors paying attention to them, managers in the sector have a better chance of spotting hidden gems. However, investments in smaller companies carry a greater amount of risk. Investments rise and fall in value and you could get back less than you invest.

When it comes to investing in UK smaller companies, funds are often the main port-of-call. And with good reason. They’re an excellent way to invest in a wide range of companies, chosen by some of the UK’s best fund managers. You can find some excellent options among investment trusts too.

Trusts have trumped funds?

Over the 10 years to 30 September 2019, the AIC Investment Trust UK Smaller Companies sector rose 283.8%. During the same period the equivalent IA open-ended fund sector grew 210.6%. That’s a significant difference but of course past performance isn’t a guide to future returns.

UK Smaller Companies investment trusts vs funds

Past performance is not a guide to the future. Source: Lipper IM *to 30/09/2019

Over the last 10 years though markets have generally gone up. When stock markets were tumbling during the financial crisis for example, UK smaller companies suffered badly. During 2007-2008 the IA UK Smaller Companies sector fell 44.6%. The AIC Investment Trust UK Smaller Companies sector slumped even further, by 48.6%.

Why are there differences in performance?

Part of the performance difference between investment trusts and funds is down to the effect of gearing, or borrowing to invest. Many investment trusts use gearing to potentially magnify gains, but it’s a riskier approach as it can also increase losses. It can make investment trusts' performance more volatile too.

The structural differences between trusts and funds can also have an impact. An investment trust manager usually has a fixed amount of money to invest, regardless of how many investors are buying or selling the trust’s shares. Fund managers, however, could be forced sellers if lots of investors want their money back at the same time, and that could negatively affect returns.

Investment trust performance isn’t only determined by the share prices of its portfolio companies. It can also be affected by investor sentiment. A trust’s own share price could trade at a discount if investors are nervous, or a premium if they’re optimistic.

Find out more about investment trust discounts and premiums

Funds or trusts – which should I choose?

There’s no right or wrong option when it comes to investing in UK smaller companies. Both funds and investment trusts have advantages and drawbacks. We think it’s more important to focus on whether the manager’s approach, regardless of the vehicle, suits your needs and risk tolerance. Smaller companies are a riskier, more adventurous option and they will be more volatile.

Things to consider include the size of the smaller companies – are they more mid-sized or perhaps even higher-risk, tiny ‘micro-caps’? Is the manager willing to pay up for growth potential or do they have a value-driven approach? How diversified is the fund? What’s the exposure to different sectors?

Let’s look at a couple of managers who run both a UK smaller companies fund and investment trust.

Harry Nimmo – one for the long haul

Harry Nimmo is one of the most experienced and successful UK smaller companies fund managers. He’s run the ASI (formerly Standard Life) UK Smaller Companies fund since 1997 and took over Standard Life UK Smaller Companies Trust in 2003. Nimmo invests in around 50 companies in both, and looks for financially strong businesses. The relatively small number of companies means that each can have a more significant impact on the performance of the fund and investment trust, which is a higher risk approach. He likes to stay invested as companies grow rather than sell for a quick profit. That makes his average company size larger than many other UK smaller company managers.

The majority of companies Nimmo invests in are held in both formats, but there are some different investments in each. Gearing in the trust is currently low at 1.6%, while its ongoing charge of 0.91% is higher than fund’s 0.77%, which is a discounted rate we’ve negotiated for HL clients. The trust currently trades at an 8.2% discount.

Since September 2003, when Nimmo took over the trust, he’s delivered an outstanding 1,122.2% gain*, while the fund achieved a lower but nonetheless excellent 861.1% return*. By comparison the FTSE Small Cap (excluding investment trusts) index returned 185.3% over the same period. These figures don’t guarantee or indicate future performance. Our analysis suggests Nimmo’s focus on more stable businesses means he’s delivered much of his best performance during market wobbles.

Annual percentage growth
Sep 14 -
Sep 15
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Sep 17 -
Sep 18
Sep 18 -
Sep 19
Standard Life UK Smaller Companies Trust 16.9% 15.5% 27.2% 14.3% -5.3%
ASI UK Smaller Companies fund 22.3% 10.5% 23.7% 17.7% 0.8%
FTSE Small Cap ex Investment Trusts 9.0% 10.5% 17.8% 0.7% -7.8%

Past performance is not a guide to the future. Source: Lipper IM to 30/09/2019

More about Standard Life UK Smaller Companies Trust inc. charges

Standard Life UK Smaller Companies Trust Key Investor Information


More about ASI UK Smaller Companies fund inc. charges

ASI UK Smaller Companies fund Key Investor Information

Roland Arnold - under the hood

Roland Arnold has run the BlackRock UK Smaller Companies fund since March 2015 and recently became sole manager of BlackRock Smaller Companies Trust in July 2019. They’ve both got lots of diversification, with roughly 100 companies in the fund and around 120 in the trust. They also share many of the same companies, such as promotional merchandise marketer 4imprint, data and analytics company YouGov and pub and hotel operator Fuller, Smith & Turner.

Arnold places a lot of importance on meeting a company’s management team. He thinks they’re vital to its success, and believes there’s no better way to gain an understanding of the business. That’s why Arnold and his team have around 700 meetings with company management each year.

The trust uses gearing – currently around 7% and Arnold can go as high as 15% - and has a lower ongoing charge. This goes some way to explaining why the trust has performed better than the fund since Arnold took over the fund in March 2015.

It’s grown 85.8%* while the fund has returned 62.6%*, which itself is ahead of the FTSE Small Cap (excluding investment trusts) index’s 24.9% gain. Past performance isn’t a guide to future returns. Our analysis suggests Arnold’s stock picking has been the main reason for his strong performance so far. The trust currently trades at its net asset value (NAV).

Annual percentage growth
Sep 14 -
Sep 15
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Sep 17 -
Sep 18
Sep 18 -
Sep 19
BlackRock Smaller Companies Trust 14.5% 8.2% 35.9% 17.6% -1.7%
BlackRock UK Smaller Companies fund 15.1% 11.6% 28.8% 13.1% -5.6%
FTSE Small Cap ex Investment Trusts 9.0% 10.5% 17.8% 0.7% -7.8%

Past performance is not a guide to the future. Source: Lipper IM* to 30/09/2019

More about BlackRock Smaller Companies Trust inc. charges

BlackRock Smaller Companies Trust Key Investor Information


More about BlackRock UK Smaller Companies fund inc. charges

BlackRock UK Smaller Companies fund Key Investor Information

This article isn’t a personal recommendation. If you’re not sure an investment is right for you, seek advice.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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