Looking at the small cap side of things, one success story is the small cap-biased funds in the UK Equity Income sector that tapped into the recovery phase of the cycle. Unicorn UK Income, for example, has returned 85.7% in the past three years and its stock-picking manager, John McClure, has certainly tapped into a small cap sweet spot.
It is hardly a secret that the large cap funds, at least in the income world, have struggled and there is no point name-dropping here to make the point.
Timing
We are now three years away from the start of the crisis, and a couple of years into the recovery phase, while not yet at the start of the growth phase – we are at least two years away from that – so are small cap- or large cap-biased funds the place to be right now?
The answer is not ‘mid cap’.
The recent market sell-off has seen mid caps under-perform small and large caps, with the FTSE 250 down by 15.3% in the past three months, compared to 11.2% and 11.7% for the FTSE 100 and FTSE 350 respectively.
Alex Wright, manager of the Fidelity UK Opportunities Fund, explains this, saying: ““There are two main reasons for this. First, technically the mid cap sector has typically been more heavily owned and is therefore more vulnerable to forced selling. Secondly, the valuations of mid caps are that much more expensive.”
Interestingly, Wright’s fund will change its name to the UK Smaller Companies Fund at the end of September, reflecting not a change of mandate or objective, but making it easier to communicate to investors what it actually does.
Opportunity set
He, like many small cap managers, is looking to take advantage of what he describes as an “indiscriminate sell-off”.
So the nimble, small cap funds and their managers are well-placed if they can match their stock-picking skills to the opportunities, particularly for income investors.
However, the market falls of the past few weeks have brought up some compelling opportunities themselves among the larger caps with even multi-managers such as Tony Yousefian, chief investment officer at OPM Fund Management, moving up the scale and buying into the likes of GlaxoSmithkline and Aviva directly.
The obvious answer is that both large and small caps have their benefits right now, but the real skill is still the asset allocation, fund/manager selection and allowing those investment the time to perform. Even mid caps look good if you look back far enough…
