WS Gresham House UK Smaller Coms C Acc
Why is this fund on our radar?
By investing in smaller companies, investors have the opportunity to capture the strong growth potential of the asset class, which can deliver attractive capital growth over the long term. The UK smaller companies market has been home to numerous world-beating companies and remains very diverse, and as a whole has typically performed better than the larger companies over the long-term, albeit with more volatility and therefor ups and downs. To navigate the high return opportunities, potential for more risk and numerous stocks on offer, active management, rather than a passive investment, is arguably a better approach.
The Gresham House UK Smaller Companies fund may be very well-placed to do this by virtue of manager Ken Wotton’s specialist focus on the UK small-cap asset class, and his highly disciplined, repeatable process which has a strong focus on a company’s financial performance rather than more subjective inputs. This has led to very consistent returns over the long-term, especially when accounting for risk which has led to the fund scoring well on our tests and earning a place on the foundation list.
Skip to Our VerdictPerformance
The fund has no formal benchmark, and manager Ken Wotton can invest across a mixture of different UK markets focused on smaller companies, meaning performance can come from a variety of sources. The majority of this is likely to be driven by stock selection due to his strict focus on bottom-up factors such as the fundamentals of individual companies.
The concentrated portfolio will likely add to these stock-driven returns. Ken targets between 40 and 50 stocks, meaning each one will likely have a material impact on performance. Before adding a new holding, its impact on the overall portfolio is considered, ensuring the portfolio doesn’t become over-exposed to specific risk factors, with position sizes also held at a moderate level to further mitigate volatility, without compromising potential upside.
The use of screens in the process is centred around specific characteristics which we describe later on, as well as the exclusion of certain industries, can contribute to a slight preference for companies with high earnings growth, even if they are expensive. This means the fund will likely perform best when this style is in favour, typically during periods of low or falling interest rates, whereas the fund could lag in periods where buying cheap stocks does well, such as in rising interest rates environments.
That said, the growth bias of the fund is only slight, and the impact of this was primarily mitigated by strong stock selection in the challenging period around 2022 when interest rates began to rise as we have shown in the chart below. This demonstrates how Ken’s focus on companies with resilient earnings and business models has supported performance in challenging times, and delivered on the goal of creating value throughout an economic cycle. This can be seen in the performance over the long-term, with the fund considerably outperforming the average of similar UK smaller companies funds over the past five years on a cumulative basis, as well as in each calendar year.
five-year discrete performance
Past performance is not a reliable indicator of future results
Whilst performance versus similar funds has been strong over numerous periods, smaller companies can tend to struggle versus larger companies in weaker economic environments, as has happened in the wider UK economic malaise from mid-2024 onwards. Conversely, in periods of economic recovery and growth, smaller companies tend to significantly outperform, which can lead to better returns over the longer term.
Portfolio
The manager looks to identify high-quality, resilient companies that can persist through challenging periods and therefore create value throughout an economic cycle. He looks at firms between £250m and £1bn market cap, although will allow positions to grow beyond this.
Ken starts his process with screens, which initially filter out highly cyclical sectors such as oil & gas, mining and banking, before applying a proprietary screen that considers numerous factors such as company size, financial strength and valuation to create a target list. From this list, Ken will do a deep dive on each potential holding, undertaking fundamental analysis on the financials of a firm, as well as meeting management teams to test the investment case. This process gives each company a score which will help determine an allocation. The portfolio will consist of between 40 and 50 holdings, which balances conviction with diversification, ensuring each stock brings something different to the portfolio.
The exclusion of some sectors and focus on certain characteristics means the portfolio will likely have structural biases. This includes a preference for those with clearer long-term earnings outlooks, such as technology, consumer-focused and non-banking financial firms. By contrast, the fund is likely to have low allocations to oil & gas and banking, where forecasting revenues is challenging, as we have shown in the chart below, where we have compared the trust allocations to the Deutsche Numis UK Smaller Companies Index, a common index for UK smaller companies funds.
Sector allocations
Source: Morningstar
Our Verdict
Ken and the wider Gresham House firm are specialists in UK smaller companies, with several vehicles focused on the asset class, built up over the years. As such, they have developed a process that, in our view, has demonstrated an ability to uncover high quality companies, at attractive valuations that have delivered strong share price returns over numerous time periods, which we believe makes the fund a standout choice in the sector.
This view is reinforced by the attractive return profile. The fund has typically outperformed in more challenging times. Down markets are often periods of relative weakness for smaller companies, therefore with the fund having historically outperformed in these periods, we believe a good portion of this risk could be mitigated. This means the fund could be seen as a lower risk option for investing in the exciting potential of smaller companies, without compromising on the upside potential in our view. UK smaller companies have been through a particularly challenging period in the past couple of years, with valuations arguably reflecting this. Whilst we await a catalyst for a recovery, a fund that can mitigate the downside, whilst capturing much of the upside makes a very compelling option, in our view.
Key Risks
- Smaller companies tend to be more volatile and can struggle in weaker economic conditions
- Exclusion of specific sectors could lead to weak relative performance should these rally
- UK market, particularly small caps, currently under pressure from several angles
