Small-cap and tech-biased funds such as Liontrust UK Smaller Companies and Baillie Gifford Global Discovery could make valuable addition to your ISA after chancellor Phillip Hammond’s Spring Statement, according to FundCalibre's’ Darius McDermott.
In this week’s Spring Statement the chancellor stated that “a new tech business is founded in the UK every hour” and said the tech sector is “attracting skills and capital from the four corners of the earth”.
With this in mind, FundCalibre managing director Darius McDermott has chosen a handful of funds with exposure to technology, which he believes can offer long-term growth. In the following article, we take a closer look at these five funds.
Marlborough UK Micro-Cap Growth
First on McDermott’s list is Marlborough UK Micro-Cap Growth, headed up by FE Alpha Managers Giles Hargreave and Guy Feld.
The £1.1bn fund focuses on micro-capitalisation stocks – that is, the very smallest companies on the market whose market cap is below £150m.
According to McDermott, when selecting these small stocks, Hargreave and Feld focus on detailed individual company analysis and rely on their own qualitative judgement rather than screens or target multiples.
“Because of the higher-risk nature of holding these types of stocks, the fund is highly diversified and currently has 282 individual holdings,” he said.
Marlborough UK Micro-Cap Growth has a bias towards areas of the markets that are growth-focused, such as technology, sector where Guy Feld is a specialist.
The fund’s largest sector weighting is to industrials, with companies including e-learning services provider Learning Technologies Group, intellectual property services firm RWS Holdings and sewing supply manufacturer Coats Group.
Marlborough UK Micro-Cap Growth is top quartile over one, three and five years and under Hargreave’s management has delivered a total return of 693.34 per cent compared with a gain of 325.21 per cent for the average IA UK Smaller Companies sector fund.
Performance of fund vs sector under Hargreave
Source: FE Analytics
Marlborough UK Micro-Cap Growth has an ongoing charges figure (OCF) of 0.80 per cent.
Unicorn UK Smaller Companies
The second fund on McDermott’s list is Unicorn UK Smaller Companies, a fund with a much smaller portfolio of around 40 stocks that have larger market caps than those held in the Marlborough UK Micro-Cap Growth fund.
According to McDermott, Simon Moon, who has overseen the strategy since 2013, combines sector and macroeconomic themes in his decision-making process.
Moon’s process differs from that of most small-cap funds, which tend to focuses entirely on the individual companies.
Unicorn UK Smaller Companies’ current sector overweight is to engineering companies (18.5 per cent) with installation technology specialist Somero Enterprises and British videogame developer Frontier Developments accounting for more than 8 per cent of the overall portfolio.
Other top holdings include rubber-based products manufacturer Avon Rubber and promotional gift distributor 4imprint.
Over 10 years, the fund has delivered a total return of 250.48 per cent compared with a gain of 194.04 per cent for the average IA UK Smaller Companies sector fund and a 195.63 per cent return for the Numis Smaller Companies Extended Excluding Investment Companies benchmark.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Unicorn UK Smaller Companies has an OCF of 0.86 per cent.
Liontrust UK Smaller Companies
The third fund McDermott believes could be attractive when looking for long-term growth options is the five FE crown-rated Liontrust UK Smaller Companies fund.
“Liontrust UK Smaller Companies is one of the largest, more well-known UK equity funds to invest further down the cap spectrum,” McDermott noted.
The fund is overseen by FE Alpha Managers Anthony Cross and Julian Fosh, who run the strategy with co-managers Victoria Stevens and Matthew Tonge.
According to McDermott, one of the defining characteristics of the managers when selecting companies is their tendency to find most of their winning companies in the AIM market rather than the FTSE index.
Their preference is reflected in the portfolio, which has a significant allocation to this area of the market and UK start-ups.
Another of the managers’ bias is towards companies that hold their own intellectual property and firms with dependable recurring revenue and loyal customers.
Examples of the type of stocks the managers favour are software provider Craneware and Internet services provider Gamma Communications.
The fund has been top quartile over three and five years and has delivered a total return of 378.49 per cent over 10 years compared with a gain of 194.04 per cent for the average IA UK Smaller Companies fund and a 140.97 per cent return for its FTSE Small Cap excluding Investment Trusts benchmark.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Liontrust UK Smaller Companies has an OCF of 1.36 per cent.
T. Rowe Price Global Focused Growth Equity
Next fund highlighted by McDermott is T. Rowe Price Global Focused Growth Equity, a fund he recommends for those looking to invest in innovative companies outside the UK.
The fund is run by FE Alpha Manager David Eiswert, who invests across the globe aiming to find companies with faster-than-average growth prospects.
“This tends to lead him to businesses which reside further down the cap spectrum”, said McDermott.
The fund is overweight information technology, industrials and consumer discretionary and has a 9.8 per cent overweight to information technology stocks relative its benchmark, the MSCI All Country World index.
“While Eiswert holds some of the tech giants such as Amazon and Apple, he also has exposure to less well-known companies such as American cloud computing company Salesforce.com and Priceline.com, which is a price comparison website for flights and hotels,” he said.
Over the time Eiswert has overseen the strategy, the five FE crown-rated fund has delivered a total return of 178.20 per cent compared with a gain of 91.42 per cent for the average IA Global fund and a 103.89 per cent return for the MSCI AC World index.
T. Rowe Price Global Focused Growth Equity has an OCF of 0.92 per cent.
Baillie Gifford Global Discovery
McDermott’s final recommendation is Baillie Gifford Global Discovery, a fund that, according to the managing director, has the potential to generate significantly higher returns than the broader market.
However, he noted that the fund’s focus on finding very high levels of growth relative to the broader market “may not be best-suited to the more cautious investor”.
The fund is overseen by FE Alpha Manager Douglas Brodie, who manages the portfolio with deputy managers Luke Ward and Svetlana Viteva.
“Douglas adopts an entirely bottom-up approach to stock selection and, as such, the fund has an active share of 98 per cent relative to its average peer,” McDermott noted.
“This means that its holdings differ by 98 per cent compared with other global equity funds.”
When it comes to sector allocation, Douglas’s bias towards tech and biotech small-caps is reflected in the funds’ 28.1 per cent weighting in information technology companies and the 33.4 per cent weighting in healthcare.
The fund’s largest holdings include US biopharma company Alnylam Pharmaceuticals, which specialises in treating haemophilia among other illnesses, and iRobot, which designs space exploration and military defence robots.
Since Brodie launched the fund in May 2011, Baillie Gifford Global Discovery has delivered a total return of 204.80 per cent compared with a gain of 83.59 per cent for the average IA Global fund.
The fund has an OCF of 0.79 per cent.