While retail investors have few choices if they want to tap pure North American small-cap funds, they ignore the sector at their peril as the US economy picks up. Paul Burgin reports.
By rights, UK investors should be falling over themselves to get a slice of North America’s small-cap rebound. IMA figures show the sector was the second best performer over one year to the end of June. Delivering a hefty 30.6%, it was only narrowly eclipsed by a revitalised European Smaller Companies sector.
Yet, while funds in the broader North America sector have climbed the best buy tables, the smaller companies universe has not seen a hefty sales lift from greater confidence in the US economy. Morningstar calculates the five main retail IMA North American Smaller Companies contenders have only pulled in a collective £220m over the last year or so.
The current star performer is Fleming Family & Partners (FF&P) US Small Cap Equity fund, run by Driehaus Capital Management in the US. It rose 53.8% over the year to the end of July, according to Morningstar.
Don’t miss out on the US revival
Andrew Hadley-Grave, investment manager at FF&P, believes discipline is key to Driehaus’ recent success.
“The team has achieved this result through an almost obsessive focus on process. Their discipline has allowed them to generate the type of returns they have come to view as ‘normal’. A focus on corporate earnings and the ability to grow, when combined with a valuation discipline, makes for a powerful combination,” he says.
Even so, the FF&P fund and several of the other nine funds in the North American Smaller Companies sector are unlikely to find themselves popping up on investors’ radars. FF&P imposes a £50,000 minimum investment. Investors will not find the fund on the Bestinvest or Hargreaves Lansdown platforms either.
The sector’s second best performer is an unlikely retail candidate, too. The Irish-domiciled Legg Mason Royce US Small Cap Opportunity fund is also missing from execution-only lists.
Royce manager Bill Hench has a distinctly micro-cap focus, with 43% of the fund invested in companies with a market-cap of $750m or less – tiddlers in US terms.
His stocks may be small but their earnings and growth have still beaten the Russell 2000 index over the last year. Earnings were strongest within aerospace, auto-related and homebuilder companies.
“Overall, the economy does feel quite strong and if one considered only small companies it would likely be growing at around 3%. Companies are also very lean, not having hired or invested very much in recent years. Once this happens, the effect on the wider economy could be very significant,” says Hench.
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