Investing in UK smaller companies can be risky. According to Chelsea Financial Services, one in eight British firms went bust last year. The flipside of this is that, if you get it right, the rewards can be substantial. As Patrick Collinson notes on Fundweb.co.uk, opportunities abound among UK-focused firms, as Alex Wright, manager of Fidelity’s UK Smaller Companies Fund, demonstrates.
The fund, worth just £61m and charging an annual management fee of 1.5%, has delivered a return of 33.8% in one year and 74.1% over three years. Both are top decile performances. So what’s the fund’s secret?
Wright targets cash-rich companies, backed by assets. He isn’t afraid to buckthe market. Some of his best-performing shares have been retailers, such as Moss Bros and JD Sports, says Collinson. In 2009, Moss Bros shares were down at 10p, but they now trade at 55p. “The scant attention that brokers pay to smaller companies leads to significant price inefficiencies, creating opportunities [for] active fund managers,” says Wright.
The decline of the Celtic Tiger has also helped. Three of Wright’s biggest holdings are ex-Irish-listed, internationally focused companies that have switched to a London listing. United Drug, for example, has diversified overseas, now making 80% of its revenues abroad. Other Irish favourites include oil company DCC and banana distributor Fyffes.
As Citywire.co.uk notes, Wright’s star is in the ascendancy at Fidelity. Investors who don’t mind taking on higher-than-average risk should take note.
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Fidelity UK Smaller Companies top holdings
| Name of holding | % of assets |
|---|---|
| Brewin Dolphin | 4.20% |
| Micro Focus | 4.20% |
| DCC | 4.10% |
| Paragon Group | 4.08% |
| Fyffes | 3.85% |
| United Drug | 3.41% |
| Brammar | 2.88% |
| Braemar Shipping Services | 2.87% |
| N Brown Group | 2.77% |
| Creston | 2.74% |