Three years on: best-performing UK and European funds since Brexit

Believe it or not, it’s been almost three years since the British people voted to leave the European Union.

While all eyes have been on the UK’s largest companies and the fate of the FTSE 100, UK smaller companies have been resilient in the face of adversity.

Not only have UK smaller companies funds performed better than their larger counterparts, they have also outperformed their European peers*.

UK Small Cap: active management shines through

The average fund in the IA UK Smaller Companies sector has returned 47.92%* over the period, outperforming all other UK and Europe ex-UK equity peers, as well as the index (FTSE Small Cap ex IT) which rose just 26.25%*. This highlights the benefits of active management in this asset class.

The second best-performing sector was IA Europe ex UK, which returned 38.36%*, followed by IA European Smaller Companies, which returned 37.32%*. The average IA UK All Companies fund, in contrast, returned 32.08%* while the IA UK Equity Income sector average performance was 25.08%*.

Here we highlight the top five UK and European Elite Rated and Radar funds since the referendum*.

Five best-performing Elite Rated or Radar UK equity funds since EU referendum*

FundPercentage returns*
1MI Chelverton UK Equity Growth79.43%
2Liontrust UK Micro Cap66.68%
3Marlborough UK Micro Cap Growth66.63%
4Liontrust UK Smaller Companies66.29%
5LF Gresham House UK Micro Cap58.09%

Five best-performing Elite Rated or Radar European equity funds since referendum*

FundPercentage returns*
1Jupiter European62.67%
2Marlborough European Multi-Cap53.58%
3Baring Europe Select50.59%
4BlackRock European Dynamic49.09%
5T. Rowe Price European Smaller Companies Equity46.42%

Three reasons to invest in UK smaller companies today

According to Montanaro Asset Management, the smaller companies specialist, there are three good reasons to invest in smaller companies today.

“The first is currency,” said Ed Heaven, “Over the past 5 years, sterling has fallen by a staggering 23% versus the US dollar. Much of this occurred in the immediate aftermath of the Brexit referendum when the pound slumped to a 31-year low. What UK exposure investors had was swiftly tilted towards the beneficiaries of a weaker pound: larger businesses who source so much of their earnings from overseas. As and when this reverses, investors may decide to return to smaller companies.

“The second is valuation. Despite the consensus being that earnings expectations of UK smaller companies are significantly higher than their larger counterparts, small-caps are trading at a 5% discount to large caps and 20% discount to European smaller companies. Another indication of the relative value of UK equities is demonstrated by the inverse relationship between yield and price: UK equities now yield 3.5% more than UK government bonds – a level not seen since the reign of Queen Victoria.

“This brings us to our third and final point: returns. We have calculated future returns based on three components which we assume mean-revert over time. The results of this are striking and suggest that, over the next seven years, UK Smaller Companies offer the strongest per annum return of 10.1% – a higher level than we have seen over the past half-century.”

 

*Source: FE Analytics, total returns in sterling, 24 June 2016 to 11 June 2019.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.