Investing in inventors and innovators

In his Spring Statement in March 2018, Chancellor Philip Hammond called the Conservatives the “Party for small businesses, the champion of entrepreneurs” and “with a new tech business founded in the UK every hour…” he pledged to invest in our inventors and discoverers.

We take a look at some funds that actively invest in Britain’s start-ups and some that seek out the most innovative and fastest-growing companies around the globe.

1. Marlborough UK Micro-Cap Growth

Marlborough UK Micro-Cap Growth, which is headed up by Guy Feld and Giles Hargreave, largely invests in companies which are less than £150 million in size. In other words, the managers will only hold genuinely small start-up businesses. Because of the higher-risk nature of holding these types of stocks, the fund is highly diversified and currently has 282 individual holdings.

Its largest sector weighting is to industrials at 22.8%; this includes the likes of e-learning software company Learning Technologies Group, intellectual property services firm RWS Holdings and sewing supply manufacturer Coats Group. It also has a notable exposure to tech companies including computer manufacturing company Quixant and software firm Imimobile.

When selecting these stocks, Guy and Giles focus on detailed individual company analysis and will rely on their own qualitative judgement rather than screens or target multiples.

2. Unicorn UK Smaller Companies

Next up is Simon Moon’s Unicorn UK Smaller Companies fund, which is a much higher conviction portfolio of around 40 stocks, although these tend to have slightly larger market caps than the stocks held in the Marlborough fund.

The portfolio currently has a significant weighting to engineering companies at 18.5%, with Somero Enterprises and Frontier Developments the only two holdings to account for more than 4% each of the overall portfolio. The former is a concrete installation technology specialist while the latter is a British video game developer.

While the investment process of many small-cap funds focuses entirely on the individual companies, Simon combines sector and macroeconomic themes with his decision-making process. Market areas that the manager will never invest in include biotechnology, mining and oil & gas.

3. Liontrust UK Smaller Companies

Managed by Anthony Cross, Julian Fosh, Matthew Tonge and Victoria Stevens, Liontrust UK Smaller Companies is one of the larger, more well-known UK equity funds to invest further down the cap spectrum.

The managers tend to find most of their opportunities in the AIM market rather than in the FTSE indices; the fund currently has a 71.9% allocation to this area of the market. As such, a significant portion of the fund’s portfolio is held in start-ups. The managers have a keen bias towards companies which hold their own intellectual property, as well as those with dependable recurring revenue and sticky customers.

The fund is notably more than six times overweight technology stocks than its FTSE Small Cap ex ITs index; prime examples of the types of stocks the managers favour include: largest holding Craneware, which provides innovative software to healthcare providers; and internet service provider Gamma Communications.

4. T. Rowe Price Global Focused Growth Equity

For those looking to invest in innovative companies further afield than our home market, T. Rowe Price Global Focused Growth Equity could present itself as a good option.

Manager David Eiswert will invest across the globe, including within emerging markets, in order to find companies with faster-than-average growth prospects. As such, this tends to lead him to businesses which reside further down the cap spectrum.

For instance, David has a 9.8% overweight to information technology stocks relative to the fund’s MSCI All Country World index. While he holds some of the tech giants such as Amazon and Apple, he also has exposure to less well-known companies such as American cloud computing company Salesforce.com and Priceline.com, which is a price comparison website for flights and hotels.

5. Baillie Gifford Global Discovery

The Baillie Gifford Global Discovery fund focuses on finding very high levels of growth relative to the broader market and, as such, may not be best-suited to the more cautious investor. However, it has the potential to generate significantly higher returns than the broader market.

Manager Douglas Brody has a bias towards technology and biotech small-caps; the fund currently has a 33.4% weighting in healthcare and a 28.1% weighting towards information technology companies. Its largest holding is US biopharma company Alnylam Pharmaceuticals, which specialises in treating hemophilia among other illnesses. Another significant weighting in the portfolio is iRobot, which was founded by three university students in 1990. It designs space exploration and military defence robots.

Douglas adopts an entirely bottom-up approach to stock selection and, as such, the fund has an active share of 98% relative to its average peer. This means that its holdings differ by 98% compared with other global equity funds.

All fund holding data was sourced from the company fund fact sheets, as at end January 2018

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