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The most consistent funds of the decade: IA UK Smaller Companies

31 January 2023

Small caps are one area of the market where active managers have found it easier to add value.

By Anthony Luzio,

Editor, Trustnet Magazine

Thesis Stonehage Fleming AIM is the most consistent IA UK Smaller Companies fund of the past decade, beating the most common benchmark in the sector – the Numis Smaller Companies ex ITs index – and its peer group composite in nine of the past 10 years.

Of the 43 funds in the sector with a track record long enough to be included in the study, Fidelity UK Smaller Companies was the only other fund to beat the Numis index in nine of the past 10 years, but could only beat the sector average in eight. Meanwhile, Liontrust UK Smaller Companies beat the index in eight calendar years, and the sector average in nine.

Performance of funds vs sector and index

Source: FE Analytics

Thesis Stonehage Fleming AIM is headed by industry veteran Paul Mumford, who started working as an analyst in 1963, and Nick Burchett.

It aims to invest in equities in one of the following three categories: smaller companies offering long-term growth potential; companies that have suffered a short-term setback but still offer recovery and/or future growth prospects; and companies in sectors which are perceived to be unduly depressed. 

Burchett previously told Trustnet that one area he is excited about is outsourcing, which gives companies additional capacity to carry out tasks in a more efficient manner.

“We look for companies that can retain annual service contracts with the view to ‘land and expand’ and, over time, become the trusted partner and core to running that function,” he said. An example in the fund’s top-10 is Totally, which is one of the largest providers of NHS 111 services in England.

Thesis Stonehage Fleming AIM made 287.1% over the 10-year period in question, compared with gains of 130.8% from its sector and 100.4% from the Numis Smaller Companies ex ITs index.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

The fund's returns are even more impressive when compared with those of AIM – the principal market it invests in. Over the past decade, companies quoted on AIM have made an average 32.7% return, less than a third of the amount made by the Numis Smaller Companies ex ITs index and less than an eighth of the amount made by Thesis Stonehage Fleming AIM.

Fidelity UK Smaller Companies takes a value approach to investing. Manager Jonathan Winton believes markets can be slow to react to companies that are turning their fortunes around and likes to invest in transformation stories before their improvement is recognised. He also places a heavy emphasis on limiting the downside.

The analysts at Square Mile Investment Consulting & Research said this approach has proved successful since the fund’s launch, first under Alex Wright, who now manages the Fidelity Special Situations fund and Fidelity Special Values trust, and now under Winton.

“There will be periods when this style of investing is out of favour, but we think it should provide investors with impressive returns over the long term,” they said.

Data from FE Analytics shows Fidelity UK Smaller Companies made 222.5% over the 10-year period in question. The £455m fund has ongoing charges of 0.92%.

Performance of funds vs sector and index over 10yrs

Source: FE Analytics

Liontrust UK Smaller Companies is headed up by Anthony Cross, Julian Fosh, Victoria StevensMatt Tonge and Alex Wedge, who use Liontrust’s ‘Economic Advantage’ investment process.

This aims to identify intangible assets that act as barriers to entry, allowing companies to defy industry competition and sustain a higher-than-average level of profitability.

The managers look for three intangible assets in particular: intellectual property, strong distribution channels and significant recurring business. In addition, senior management must own at least 3% of a company for it to merit inclusion in the fund.

The analysts at Square Mile Investment Consulting & Research said this approach steers the fund towards relatively steady businesses that have a competitive edge and are gradually growing and generating high levels of cash.

However, the analysts at FE Investments have expressed concern about the £1.2bn size of the fund, which they said contributes to liquidity risk. Liontrust UK Smaller Companies made 231% over the 10-year period in question.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.