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Three funds looking outside the world’s biggest companies

25 June 2020

Fidelity International’s Daniel Lane highlights three mid-cap funds which he thinks are able to find an “edge” away from the most closely watched stocks in the market.

By Eve Maddock-Jones ,

Reporter, Trustnet

Funds such as Threadneedle UK Mid 250CRUX European Special Situations and Schroder US Mid Cap could be attractive options for investors looking outside of the best-known stocks in the market, according to Fidelity International’s Daniel Lane.

Fidelity senior personal investing manager Lane said the problem with large-caps is that they’re often heavily covered by analysts and investors find it challenging to gain an information advantage over their peers.

“Finding an edge in the major indices can be tough because the volume of research going on means spotting something different requires either luck or immense skill,” Lane said.

But mid-caps tend to fly slightly more under the radar than large-caps, meaning there’s different opportunities to grab, he added.

“Look further down the scale to some of the mid-size companies and suddenly the opportunity set grows,” he said.

“Mid cap companies’ obscurity relative to their larger peers means they are scrutinised by fewer research analysts, have fewer investors and experience lower trading volumes, meaning there can be bigger differences in what the market says they are worth and the value analysts have in mind.”

Below are three mid-cap funds that Lane thinks are among the best at exploring these opportunities.

 

Schroder US Mid Cap

First up is the £1.1bn Schroder US Mid Cap fund, which has been run by Robert Kaynor since the start of 2018. He took over from FE fundinfo Alpha Manager Jenny Jones, who retired last year.

The fund focuses on three different types of companies in the lower 40 per cent of the US market. The bulk of the portfolio is in ‘mispriced growers’, or firms the manager believes will undergo a significant change over the next two to three years although the rest of market does not yet appreciate this.

Performance of fund vs sector & benchmark over 3yrs

 

Source: FE Analytics

The rest of the portfolio is split between ‘steady Eddies’ and ‘turnaround opportunities’, with the former made up of stocks that provide dependable earnings and resilient revenue streams combined with having low sensitivity to shifting economic conditions.

The final and smallest group – making up a fifth of the fund – is the ‘turnaround opportunities’, or stocks that are undergoing significant challenges. “For Kaynor, struggling companies deserve a look only when there is a genuine catalyst for recovery,” Lane said.

Some of the companies Schroder US Mid Cap currently has in its top 10 are global drug delivery technology provider Catalent, plastic products manufacturer and marketer Berry Global and flooring manufacturer Mohawk Industries.

“If you haven’t heard of them, remember that might just be the point,” added Lane.

Over the past three years the fund has made a total return of 8.56 per cent, putting it in the bottom quartile of the IA North American sector (where the average fund is up 32.78 per cent) and underperforming the Russell 2500 index (up 13.66 per cent).

Schroder US Mid Cap has an ongoing charges figure (OCF) of 0.91 per cent.

 

Threadneedle UK Mid 250

Lane’s next pick is the £55m Threadneedle UK Mid 250 fund, which he said “is one of a small number that focus on the gap between the very biggest and the smallest UK listed companies”.

On the fund’s holdings, Lane said: “These are companies beyond their start-up phase, where the risk of failure is still high, but not yet mature and therefore still with room to grow.

“From an investor’s point of view, these are established businesses whose shares enjoy good levels of liquidity, removing one of the risks of investing in even smaller companies.”

Performance of fund vs sector & benchmark over 3yrs

 

Source: FE Analytics

Although the companies are small in size, Threadneedle UK Mid 250 manager James Thorne, said that their ‘fate’ isn’t reliant on that of the UK economy, since almost 50 per cent of revenues in the FTSE 250 are international.

He believes there is an opportunity when companies transition being a domestic player to a true international company, a move Thorne called the “gear change”.

He added that when companies are growing in this way, they can start off being separate businesses, having a domestic operation and an international side. But when they combine under one cohesive vision, the manager believes their value will rapidly pick up and this is the point the fund most anticipates.

Thorne runs the fund alongside co-manager Philip Macartney and over the past three years it has made a loss of 5.39 per cent, beating the FTSE 250 ex ITs index’s fall of 7.45 per cent. However, it has underperformed against its IA UK All Companies peer group, which was down 3.75 per cent.

Threadneedle UK Mid 250 has an OCF of 0.91 per cent.

 

CRUX European Special Situations

Lane’s final mid-cap fund pick is the £1.3bn CRUX European Special Situations fund, which has been run by FE fundinfo Alpha Manager Richard Pease since 2009 and co-manager James Milne since 2015.

It is run with a bottom-up investment approach looking for growth generating companies in niche areas. Lane said the managers “particularly like when these businesses make sensible bolt-on acquisitions to complement their organic growth”.

Performance of fund vs sector over 3yrs

 

Source: FE Analytics

“[They] emphasise the importance of patient company management, capable of delivering a long-term growth strategy,” he added.

To navigate the risk of the European market, Milne explained that he and Pease look for companies with a presence beyond their domestic markets, focusing on more global or pan-European businesses so that any economic-political issues will only affect one part of the business.

CRUX European Special Situations concentrates on companies with strong recurring revenue streams. In addition, the  managers avoid more capital-intensive businesses, such as oil, steel or cement companies, and prefer capital-light service businesses, which find it easier to grow and tend to pay higher dividends.

Over the past three years the fund has a made a total return of 0.44 per cent, an underperformance against the IA Europe Excluding UK sector, where its average peer made 6.67 per cent.

CRUX European Special Situations has an OCF of 0.86 per cent.

 

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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.