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Three hidden gem funds with big potential

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Written by: Darius McDermott
10/04/2017
The world’s most expensive diamond ever sold at auction went for £57m (US$71m) this week. While that’s an awful lot of money to spend on a tiny rock, the buyers—Chinese jewellers Chow Tai Fook—will aim to make yet more money from its onsale, presumably. In the spirit of uncovering some hidden gems of our own, this week we take a look at three small funds with big potential.

Wood Street Microcap

This fund focuses on finding the UK’s best and brightest entrepreneurs, and investing when they are right at the start of their journey. The fund itself has assets under management of around £68m, and the companies in which it invests are typically valued between £50m and £250m. To put this into context, the 100 largest companies on the London Stock Exchange (i.e. the FTSE 100) range in value from around £3bn to around £180bn.

A fair amount of uncertainty surrounds smaller companies in the UK at the moment, as these businesses are usually more exposed to the domestic economy and no-one is quite sure how it will perform as negotiations begin for Britain to leave the European Union. So buying into micro caps could prove an adventurous choice in the short term. On the other hand, UK smaller companies are currently at their biggest discount to UK larger companies in 17 years, and so this could be an attractive entry point.

A fund such as Wood Street Microcap should be a long-term buy and manager Ken Wotton has also run venture capital trusts for many years, so he knows what to look for in a fledgling business.

T. Rowe Price European Smaller Companies

With assets under management of just £67.7m, this fund also has plenty of room to grow. It is pan-European, meaning it invests in both the UK and Europe – currently with just over 30% of the fund in the UK. For those who are wary of too much exposure in Britain in the short term, this fund could be a good way to invest with a more mixed approach.

Europe’s economy is broadly considered to be entering a recovery phase, with growth and inflation finally picking up across the continent. And unlike the US and UK, whose share markets have reached record highs in the past year, European equities are comparatively cheap.

National elections in key economies such as France and Germany could throw a spanner in the works, but this fund’s carefully diverse positioning and focus on high quality, durable franchises means it may offer a way to gain exposure to Europe’s recovery potential in a vehicle that has historically been a little less volatile than European smaller companies overall.

Mirabaud Equities Europe Ex UK Small & Mid

For a truly ‘hidden gem’, Mirabaud Equities Europe Ex UK Small & Mid has assets under management of just £33.1m and invests, itself, in those companies that other funds and analysts might have missed. Its manager, Ken Nicholson, says he and his team spend their lives living out of suitcases to complete an extensive road trip programme.

Ken tends to ignore politics completely and focus on simply finding good businesses, which may make his fund particularly appealing in the current environment. His aim is long-term capital appreciation and to this end he also pays a lot of attention to what could go wrong, maintaining a strict sell discipline. While this fund has only been going since 2015, Ken successfully ran a very similar mandate from 2007 to 2014 at Standard Life, producing returns more than double his sector peers in that time period.

Darius McDermott is managing director of Chelsea Financial Services 

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