Juliet Schooling Latter, research director, FundCalibre, examines funds that have reached or are nearing their three year anniversary. Here she turns to the small cap market and the TM Tellworth UK Smaller Companies fund.
Having withstood the uncertainty of Brexit and the unprecedented challenges of the Covid 19 pandemic – UK smaller companies have been all about resiliency in recent years.
The pandemic was the acid test for UK small caps. I remember reading at the height of the crisis that nearly a fifth of all small and medium-sized businesses in the UK were unlikely to get the cash they needed to survive by the end of April 2020*.
Although we’ve not seen the back of the pandemic, things look a lot rosier now. Brexit has been (largely) tackled and the vaccine bounce has also bolstered confidence. There is also a growing interest in UK plc, with M&A activity on the rise.
Optimists will tell you we’ve gone from famine to feast – in terms of opportunities. The long-term story also tells us that now might be a good time to invest in UK small-caps, given their long-term outperformance. The Numis smaller companies index has returned more than three times as much as the FTSE All Share in the past 20 years (670.8 per cent vs. 202.3 per cent)**.
Recent history has shown us experience and flexibility are the keys to success. The TM Tellworth UK Smaller Companies fund launched in November 2018 and is run by two of the UK’s most highly regarded small-cap managers in Paul Marriage and John Warren.
The managers had an outstanding long-term track record on their previous fund, Schroder UK Dynamic Smaller Companies. Paul ran the fund from 2006, with John joining as co-manager in 2010. Both left to set up Tellworth in 2017 and are majority shareholders.
This is as pure a UK smaller companies fund as you’ll find – almost 90 per cent of the fund is invested in companies with a market-cap under £1bn***.
The managers start by eliminating high risk speculative stocks and do not invest in ‘blue sky’ companies, oil & gas, biotech or mining firms. This leaves a universe of around 600 stocks, which are then subjected to screening.
The ‘Sinners’ screen excludes stocks with aggressive accounting, poor corporate governance or a weak financial position. The ‘Alpha Seeker’ screen looks for companies that are poorly covered and have the most potential to be mispriced. Finally, the ‘Thermostat’ screen looks at the short term (3-6 month) conditions in the UK economy.
This leaves approximately 300 stocks, to which the managers apply their ‘PMMM’ process:
Product, whereby the company must have a differentiated product, backed by its own research & development;
Market, in that it should be a market leader in its chosen niche;
Margin – it must demonstrate the ability to grow margins and generate cash; and
Management – the company’s leaders must be aligned to shareholders.
These companies will make up 75 per cent of the portfolio. The remaining 25 per cent will be made up of value opportunities such as self-help stories which are enjoying a turnaround or misunderstood businesses. The split will depend on different market conditions and the managers can invest outside of the approach.
The fund is well diversified with around 50 underlying holdings. Every new position starts at a minimum of 1 per cent and has a maximum size of 5 per cent.
The fund has returned 59.9 per cent since launch, slightly ahead of the 56.2% sector average**** and has an ongoing charges figure of 1.28 per cent***.
Both managers have an outstanding long-term track record investing in smaller companies, in a number of trying conditions. This fund is very similar to portfolios they have run before – with a solid but flexible process, which affords them the necessary freedom to focus on the job of picking stocks. We have high hopes that they can repeat their past success with this new venture.
*Source: BBC News Article – 1 April 2020
**Source: FE fundinfo, total returns in sterling for Numis Smaller Companies 1000 Excluding Investment Companies and the FTSE All Share, 2 August 2001 to 2 August 2021
***Source: fund factsheet, 30 June 2021
****Source: FE fundinfo, total returns in sterling, 29 November 2018 to 4 August 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.