Jupiter UK Smaller Companies
1-year return: 35.7% | 3-year return: 94.1%
Jupiter UK Smaller Companies lifts the Best UK Smaller/Mid Cap Equity fund trophy thanks to its manager’s strong stockpicking prowess. The fund has returned 35.7 per cent over the past year, vastly outperforming the peer group. It is in the top quarter of the IA UK Smaller Companies sector over one and three years. Moreover the fund has outperformed the sector average by 33.4 per cent in the year to the end of March 2018.
James Zimmerman became assistant manager on the £325 million fund in October 2014, and lead manager in June 2015. His objective is to obtain long-term capital growth by investing primarily in UK smaller companies that are of high quality and therefore have significant growth potential.
Zimmerman starts with a simple premise: companies where management own a significant stake in the business should deliver superior long-term returns for shareholders. They are less likely to jeopardise the long-term health of the company and will be more motivated to develop wealth through steady share price growth as the business grows profitably over time.
The share prices of smaller companies are often more volatile than larger companies but Zimmerman takes a relatively conservative approach, favouring businesses in strong financial positions and avoiding those operating in technically complex areas, such as healthcare. By favouring owner-operated companies and being disciplined about investing in relatively stable and simple businesses, he narrows his investable universe from more than 1,000 to 150 companies deemed worthy of more detailed research. From these, he selects a portfolio of around 60 holdings.
HIGHLY COMMENDED FUND
TM Cavendish Aim
1-year return: 25.3% I 3-year return: 91.7%
A close runner-up in this category, TM Cavendish Aim has been delivering consistently strong performance for investors by investing in a portfolio of smaller, growing businesses. Run by experienced smaller companies investor Paul Mumford, this £75 million fund is unusual in the sector in that it focuses solely on companies listed on the Alternative Investment Market.
These companies are at the riskier end of the spectrum, because they are typically at an early stage of development. Mumford mitigates this risk by holding more than 70 companies with an initial investment of no more than 1.5 per cent of the portfolio. If a company goes bust he loses relatively little, and it therefore does not have too damaging an effect on the wider portfolio.
As a value investor, Mumford likes companies with strong long-term growth potential that are trading at attractive valuations. This means he often fishes for bargains in unloved sectors. He made a handsome profit picking up oil and gas stocks at the height of the bear market back in 2009, with many of his purchases subsequently being taken over. He focused on this area again in the wake of the 2014 oil price crash, when oil and gas shares were trading at ‘stupidly low’ valuations.
However, he has not been immune from ‘value traps’, an example being retailer HMV. Its share price was being hit by declining CD sales, but Mumford took a position in 2009 after The Beatles brought out a CD boxset and the death of Michael Jackson suggested his CDs would fly off the shelves. The company went into administration in January 2013.