1. 8 TheBiggerPicture
SmallerCompanies
investmentweek.co.uk 2 March 2015
As correlations between asset classes rise and
prominent industry figures such as Crispin Odey
predict a looming disaster for equities, investors
are trying harder than ever to find uncorrelated
investment ideas which could offer some form of
protection and diversification.
This shift could go some way to explain the
popularity of funds investing in the smallest of
the small caps. But, with these funds running
with limited capacity, what is the best way for
discretionary managers to access micro- and
nano-cap strategies on behalf of their clients?
Giles Hargreave is one of the most recognised
investors in this part of the market, and his
Marlborough Nano Cap Growth fund was
heavily oversubscribed when it launched at the
end of 2013.
The group effectively soft-closed the portfolio
with the addition of a 5.25% front-end charge
in a bid to keep it small enough to protect
performance, and its AUM today is £91m. The
Nano Cap fund focuses on finding the best UK
businesses with a market cap below £100m.
Hargreave’s UK Micro-Cap Growth fund has
also been popular – the £415m portfolio boasts
strong performance with a return of 144% over
the five years to 13 February, compared to a
103% average return from the IA UK Smaller
Companies sector. Hargreave defines micro caps
as those businesses with a market cap of £250m
of less, although his portfolio also invests in
firms under £150m in size.
As interest in this space gathered pace, River
and Mercantile brought a closed-ended fund to
market for small-cap specialist Philip Rodrigs. His
12 February 2010 – 12 February 2015. Source: FE
Feb 2010 Feb 2015
-20
0
20
40
60
80
100
120
Feb 2011 Feb 2012 Feb 2013 Feb 2014
FTSE Fledgling (ex ITs)
IA Smaller Companies
FTSE Small Cap (ex IT)
FTSE AIM
%
Comparativeperformance
River and Mercantile UK Micro Cap investment
company raised just over £50m during its offer
period at the end of 2014, half the maximum
amount it was targeting. The R&M trust has an
interesting structure in that it will compulsorily
redeem a portion of shareholders’ stakes in order
to keep the NAV at around £100m.
The need to keep portfolios at a certain size to
maintain performance is especially important
at the small end of the equity market, but it does
pose a problem for discretionary wealth managers
who may have a sizeable chunk of client money
to invest.
Ben Willis, head of research at Whitechurch
Securities, said he prefers to access micro caps
through small-cap managers with a preference
for investing across the market-cap scale, such as
Gervais Williams at Miton, who has experience
investing in the FTSE Fledgling market and runs
smaller companies and multi-cap funds. Other
small-cap funds which can allocate a significant
portion of their assets to micro and nano caps
include the Aberforth Geared Income trust, and
MFM Slater Growth, which had almost a quarter
of its portfolio in AIM stocks towards the end of
last year.
“We hold Aberforth Income in a few of our
higher risk, growth portfolios. The managers
are quite value-oriented so they will go down to
the smaller end of the cap scale. Slater Growth
also has a small-cap bias, so it has had a purple
patch over the last few years, but we have to look
under the bonnet and see what is actually in the
portfolio,” said Willis.
“We would not look at micro-cap specifically
because we have exposure to small-cap managers
who dabble in those areas. When we buy a
position, it can be quite big, so we want to make
sure we have enough liquidity.”
Closed-ended opportunities
Willis is more interested in the closed-ended
structures which offer exposure to micro caps
but also have easily tradable shares. Rodrigs’ trust
is on his radar, as well as one of the most hotly
anticipated launches this year, Neil Woodford’s
Patient Capital trust.
“Woodford’s upcoming fund will have around
half of the portfolio in those kinds of names, and
continued on page 10
Access,capacityconstraintsandtime
horizons:Theissuesfacinginvestors
intheUK’smicro-capstrategies
Hannah Smith takes a closer look at recent launches in the space and how wealth managers
are using these strategies to diversify their portfolios
Investment Week podcast
To listen to the latest Investment Week
podcast on fund fashions
go to: www.investmentweek.co.uk
008-011_IW_0203.indd 8 26/02/2015 11:48

2. 10
investmentweek.co.uk 2 March 2015
TheBiggerPicture
SmallerCompanies
will also be closed-ended,” Willis noted.
The Patient Capital trust, which will focus on
start-up companies, will no doubt see strong
demand, especially as Woodford is targeting just
£200m during the launch period and the fund is
being marketed by Hargreaves Lansdown via its
Vantage platform.
Investors will have to move quickly, as was the
case with Giles Hargreave’s Nano-Cap fund.
Adrian Lowcock, head of investing at AXA
Wealth, said he counts himself fortunate to
have got into the Marlborough fund at launch,
meaning he could avoid the 5% initial charge
imposed to stem inflows.
“I own this fund primarily because I like the
manager so much. The problem is, these funds
can only be so big. You can’t get a lot of money
in without destroying the process. You can get in
to the space with VCTs but you have to be quite
quick, and be aware they are not always run in
the same way [as a fund], often they are run for
tax efficiency.”
Volatility
Of course, the small end of the equity market is
not for the faint hearted, nor for those without
a very long-time horizon, as it can offer a rough
ride. Data from FE shows micro-cap funds have
tended to be more volatile than the FTSE 100 and
the IA UK Smaller Companies sector over the last
five years (see table), although the three-year data
is more mixed.
In terms of performance, the differences
between AIM and its counterparts over the long
term is striking (see graph), as stock specific risk
can have a significant drag effect. For example,
Quindell and ASOS are larger than most FTSE
Fledging constituents but are able to remain in
the AIM index because of its less stringent rules
on size. Sharp share price falls for both groups last
year had a disproportionately large impact on the
overall market.
But at the end of 2014, micro-cap stocks
helped managers at the very bottom of the cap
scale dodge the impact of a rotation into larger
companies which had been a major theme
during the year. So should micro and nano caps
be viewed as distinct from small caps, or do they
tend to move in tandem? Hargreave said it can go
either way - sometimes micro caps will rise and
fall in line with their larger peers, and sometimes
they provide useful diversification away from
small-cap names.
“There is no hard and fast rule, it really does
From 3,000 companies
to 50 high-conviction stocks
in 1 top-decile fund.
Fidelity American Special Situations Fund
This advertisement is for Investment Professionals only, and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and clients may get back less
than they invest. Past performance is not a guide to the future. Source of data is Fidelity / Morningstar, bid-bid, net income reinvested at UK basic rate of tax as at 31.12.14. Manager tenure is 31.12.12. Sector is IA North America. Index
is SP 500 Index (NUK). Copyright © 2015 Morningstar, Inc. All Rights Reserved. Rayner Spencer Mills rating as at 31.12.14. This fund invests more heavily than others in smaller companies, which can carry a higher risk because
the share prices may be more volatile than those of larger companies. Issued by FIL Investments International, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide
Investment logo and F symbol are trademarks of FIL Limited. UKM0115/5241/CSO7000/0315
Job No: 49628-15 Publication: Investment Week Size: 159x474 Ins Date: 09.02.15 Proof no: 1 Tel: 020 7291 4700
Comparativevolatility(orderedbyfive-yearfigures)
Name 3yrvol(%) 5yrvol(%)
GVOInvestmentManagementStrategicEquityCapital 10.6 12.8
FTSESmallCap(exIT) 6.5 11.2
CFWoodStreetMicrocapInvestment 7.4 10.8
MarlboroughUKMicroCapGrowth 8.4 10.8
FTSE100 9.1 10.5
IAUKSmallerCompanies 6.7 9.3
CFICOctopusUKMicroCapGrowth 9.3 9.2
RiverAndMercantileUKMicroCap N/A N/A
MarlboroughNanoCapGrowth 8.7 N/A
CFMitonUKSmallerCompanies 9.9 N/A
Total return annualised ratios over 12 months (30 January 2014 - 31 January 2015) against funds’ own sector average (risk free rate at 0%).
Source: FE
Seepage26
To read about ITs and OEICs in
the small-cap space
008-011_IW_0203.indd 10 26/02/2015 11:48

3. 11TheBiggerPicture
SmallerCompanies
2 March 2015 investmentweek.co.uk
web: fidelity.co.uk/amspecsits
call: 0800 368 1732
The world’s largest stock market continues to grow – leading
the global recovery.
To outperform such a well-researched market, the Fidelity
American Special Situations Fund follows a rigorous
investment approach:
a high-conviction portfolio with 87% active money
investing in undervalued stocks across the market cap range
backed by a large and experienced research team
The fund has delivered consistently strong performance
– achieving top-decile returns over 1, 2, 3, 4 and 5 years,
and beating 97% of competitors over portfolio manager
Angel Agudo’s tenure.
So for greater growth potential, look to the fund
that’s earned its stars and stripes.
Fidelity American Special Situations Fund
Cumulative performance
1 year 3 years 5 years Tenure
Fund 26.6% 85.7% 111.5% 66.4%
SP 500 20.4% 72.3% 108.6% 55.9%
Quartile 1st 1st 1st 1st
Sector ranking 2/110 3/103 5/94 4/106
Source: Fidelity and Morningstar as at 31.12.14 on a bid-to-bid basis with income reinvested net of basic rate tax.
©2015 Morningstar, Inc.All Rights Reserved.
vary. There are times when these very small
companies can provide defensive qualities
because no-one is trying to sell them and they
are left to their own devices. It is also true that
many of these smaller companies are very much
niche businesses, which can also provide some
protection. But there will be other times when
people are selling and it is difficult to get out.”
This, of course, is part of the challenge of
investing in this less researched part of the
market.
“To manage the volatility you get with small
caps, we hold broadly diversified portfolios. In the
micro-cap fund, for example, we have more than
250 stocks and even the largest position is rarely
more than 2% of the portfolio,” Hargreave added.
Time horizons
Consequently, Lowcock said he would encourage
investors in this asset class to take a longer than
average view.
“Micro-cap managers may fall a bit short term
if markets are against them, but they tend to be
better at protecting on the downside and will
outperform strongly on the upside. But you have
to hold these funds for the long term – I genuinely
think it should be a 10-year plus time horizon for
nano- and micro-cap funds,” he said.
Stocksnapshot
Marlborough UK Micro-Cap Growth
Cello Group:Celloprovides
specialistmarketingservicestothe
globalpharmaceuticalindustryand
countsmostofthebiggestnamesin
thebusinessasclients.Management
areextremelycompetentand
goodresultsreportedrecently
wereovershadowedbyanissueinvolvingVATchargingby
asubsidiary,sothestockisattractivelypriced,accordingto
Marlborough.
Market cap:£77m
% change over one year:8.7%
Clipper Logistics:Clipperprovides
logisticsservicesforonlineretailers
includingASOS,JohnLewis,and
Tesco.Onlineretailisagrowing
market,andthiscompanyis
exceptionallygoodatwhatitdoes.
Market cap:£170m
% change over one year:N/A
Datato25February2015.Source:Bloomberg
Marlborough Nano-Cap Growth
Finsbury Food:Finsburymakes
premiumcakesandbreadfor
supermarketsincludingTesco,
Sainsbury’s,andMarksand
Spencer.Animportantstrengthof
thecompanyisthatitisoneofthe
fewsupermarketsupplierswhich
havebeenabletomaintaindecentmargins,Hargreavesaid.
Market cap:£86m
% change over one year:28%
Fairpoint Group:Fairpointisbest
knownforitsdebtmanagement
business,providingIndividual
VoluntaryArrangementsand
DebtManagementPlansfor
thoseinfinancialdifficulties.It
hasrecentlyexpandedintolegal
services,followingtheacquisitionoflawfirmSimpsonMillar.
Fairpoint’sstrongmanagementteamaretransformingthe
business,butitisstillratedasifgrowthprospectswerevery
low.Asanadditionalappeal,thestockoffersanattractiveyield.
Market cap:£47m
% change over one year:-13%
Seepage54
To see how your smaller
companies funds are
performing
008-011_IW_0203.indd 11 26/02/2015 11:48