all funds failed to post positive returns over past 12 months with only discretionary, aberforth and premier delivering the goods over 3 years
The UK Smaller Companies sector has suffered a difficult three years in which no fund has delivered positive returns in each of the discrete 12-month periods.
All 70 funds lost double-digit sums in the 12 months to the end of April 2003 and over three years to the end of April, the average portfolio fell by 37.52% before charges, according to Standard & Poor's.
Divergence in performance across different funds was marked, with only three vehicles, those managed by Discretionary, Aberforth and Premier, delivering positive returns over three years.
A £1,000 investment in the top performer, Discretionary unit trust, over three years would have grown to £1,310.30, while the same amount invested in the bottom performer, Exeter Smaller Companies, would have been reduced to £241.50, before charges.
Credit Suisse Smaller Companies, managed by Crispin Finn, has returned -12.52% over the three years to the end of April, outperforming the sector average in each of the past three discrete 12-month periods.
Finn attributes much of his outperformance to making the call in September 2000 to sell out of technology and make the portfolio more defensive.
'A lot of our success goes back to September 2000 when we reduced the exposure to speculative stocks and switched into areas less sensitive to an economic downturn,' he said. 'This proved a reasonable strategy and we managed to get into some stocks early and at attractive levels.'
Finn bought into areas of the market benefiting from public spending, such as healthcare, and other areas able to show growth regardless of the economic cycle, such as support services.
He also increased the focus on companies' cashflow and balance sheets. This led him to buy a number of quality companies that were on such low valuations they were vulnerable to takeovers and management buyouts. Subsequently, a handful of the fund's holdings were taken over at a premium, further boosting returns.
'We have also had exposure to consumer stocks, less so now but over the three years those positions have been very useful,' Finn said.
Getting into these more value-oriented stocks before many of his peers exited technology and moved into more defensive areas meant Finn was able to enjoy momentum lifts of other managers buying into these stocks.
In the 12 months to the end of April 2001, the fund posted growth of 10.6% versus a sector average fall of 4.66%. From May 2001 to April 2002, it was up 2.07% compared to a sector average loss of 12.35%.
The more broad-based market decline of the past 12 months led Credit Suisse Smaller Companies to fall 22.51%, while the sector lost 27.51% on average.
Finn has recently been reducing his exposure to consumer stocks, which have enjoyed a strong run, and is looking at raising the beta of the fund by buying into stocks capable of cyclical recovery. The fund's below-average beta of 0.82 has been largely down to the focus on cashflows, he said.
Investec UK Smaller Companies, managed by Dan Hanbury, is another portfolio that has consistently outperformed, while managed with a low beta.
The fund has returned -10.1% over the three years to the end of April with a beta of 0.72 and, like Finn's fund, outperformed in each 12-month period.
Hanbury said the Investec UK desk uses a systematic process developed three years ago. Stocks are initially screened using an in-house system that focuses on cashflow returns on investment over the cost of capital.
Managers then make judgements on the quality, ability to grow margins and valuation of companies that passed the screen, along with tracking any changes in market sentiment on the stock, adding a behavioural finance element that looks for momentum and earnings revisions.
The fund's one-year numbers, down 14.39% versus a sector average loss of 27.51%, were supported by Hanbury moving overweight in utilities and oil & gas late last summer.
Over the past three years, he has also been strong on housebuilders, aerospace and defence, retailers and, until last summer, food & beverages, which have protected the fund on the downside, he said.
Although this preference for lower beta stocks caused the fund to underperform for several weeks after the post-September 2001 cyclical rally, the fund recovered to outperform between May 2001 and April 2002, losing 0.55% versus a 12.35% sector average loss.
While preferring to avoid the value tag, Hanbury concedes the fund has been positioned as such over the bulk of the past three years but that is starting to change.
'We have been underweight IT hardware, software, media, and telecoms but over the past six months it really feels like the portfolio has changed and we are more growth biased. We were pretty bearish for a couple of years but positive about the rest of the year, although cautious on a five-year view.'
After the recent rally, Hanbury expects the market to fall back a little and said he will buy into the dips.
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