Using data from FE fundinfo, Portfolio Adviser shines a spotlight on the funds across different sectors that are smaller than £100m in size, but have achieved top-quartile returns over the past three years relative to their average peer. This month, we examine the tiny IA UK All Companies funds that have thrived in a challenging monetary environment despite their small size.
Funds investing in UK equities have faced a number of macro headwinds in recent years as historically high inflation and interest rates weighed on company balance sheets. Yet some investment strategies excelled where others struggled to clear the hurdles. Seven of those outperformers are less than £100m in size, but only three are actively managed.
Redwheel UK Climate Engagement
Fund size: £27m
The highest-returning of them is the Redwheel UK Climate Engagement fund, which is up 35% over the past three years. Its peer group delivered less than half of that over the same period, climbing 16.6% on average.
Managers John Teahan, Ian Lance and Nick Purves joined the firm from Schroders in 2010 to set up the strategy. They take a hands-on approach to engaging with companies in their decarbonising process. Their strategy is built on the principle that low-emitting companies trade at a premium to carbon intensive ones, so working with them as they decarbonise leads to higher returns.
“By engaging for change, we can help carbon-intensive companies decarbonise and encourage them to take advantage of the opportunities that could emerge from the climate transition,” Redwheel says in the fund’s primer.
“As consumer preferences and regulations change, new markets will open up – carbon-intensive companies are in a prime position to capture these opportunities as part of their decarbonisation drive.”
Redwheel UK Climate Engagement has managed to come out on top in a period where sustainable investment strategies have been out of favour. However, the fund’s focus on carbon-intensive companies means it has allocations to stocks not typically seen in sustainable portfolios.
Oil companies Shell and BP, gas provider Centrica and miner Anglo American are among its top holdings, jointly accounting for 18.6% of the fund. Yet the managers say the decision taken by most of their peers to exclude these companies is detrimental to both returns and overall decarbonisation efforts. The fund’s primer says “traditional mandates are limited in their ability to meet all these challenges”.
“To address values or preferences and reflect climate as a systemic issue, the industry has gone down the exclusionary route. However, the weaknesses of that approach are now being exposed,” it adds.
“On the systemic risk, divestment and exclusion have failed to deliver substantial real-world decarbonisation, while such exclusion has resulted in style concentration that is now negatively affecting financial returns.”
Janus Henderson Institutional High Alpha UK Equity
Fund size: £9m
Another tiny active fund that has outperformed most of its peers is Janus Henderson Institutional High Alpha UK Equity. It is up 28.6% over the past three years, taking a 12 percentage point lead against the rest of the IA UK All Companies sector.
The £9m fund’s purpose is to provide investors with a combination of both capital growth and income – two goals that manager David Smith has successfully delivered on over the past three years. Not only has the fund produced top-quartile returns, but it also boasts the fourth-highest yield in the sector at 3.6%. This is markedly higher than the 2.3% yield on offer from its average peer.
Liontrust UK Focus
Fund size: £9m
Also outperforming its much larger peers is Liontrust UK Focus, which beat the IA UK All Companies sector by 13.5 percentage points over the past three years with a total of 30.1%. It did so despite being the fourth-smallest portfolio in the 224-strong sector. Its assets under management of just £9m are dwarfed by the £811m held by its average peer.
Manager Imran Sattar invests predominantly in the FTSE 350, with over half (60.7%) of the fund held in FTSE 100 companies. He also has the freedom to invest up to 20% of the portfolio outside of the UK, which he has utilised to take a 9% position in the US and 4.7% allocation to Finland. Having greater diversification across market capitalisations and regions globally may have helped the fund excel in recent years.
However, Sattar notes in a recent outlook that just as the UK domestic environment begins to “appear more sanguine”, risks in global markets have heightened due to US president Donald Trump’s escalating trade war.
This may present headwinds for international holdings, but the improving domestic situation could create benefits for those invested in the UK, he says. “With chancellor Rachel Reeves’ inaugural budget now in the past, UK consumers can plan their finances with greater certainty, and in any event, they are in better shape compared with a few years ago having retained a greater proportion of savings built up during Covid, particularly when compared with consumers in the US,” Sattar adds.
“We are also considering the increase in employer National Insurance rates, which are a modest headwind for the more domestically orientated holdings in the portfolio.”
This article originally appeared in the April issue of Portfolio Adviser magazine
