Marlborough UK Equity Growth quite possibly needs no introduction. The fund is the worst performer in the sector over the past three years, and nearly the worst over the past five. Manager Michael Barnard has kept the bulk of the fund in AIM-listed shares with roughly 70% in micro-cap equities at last tally. That has hurt the fund badly as the AIM has badly underperformed the broader market. However, even relati
ve to a more tightly defined peer group, the Morningstar UK Small-Cap Equity category, it has performed miserably over the past several years (it was also the worst performer of the funds within that category that have micro-cap exposures north of 60% of assets). Even if you were still tempted, however, we would pass—AIM listed shares can be high-risk bets, and the limited liquidity of many micro-caps can subject their share-prices to volatile swings in response to relatively light trading activity.
The New Star offering has had largely the same problem as the Marlborough fund—an overwhelming emphasis on the tiniest companies--and therefore suffers from the same general risks outlined above. Manager Patrick Evershed has had success in the past, but we generally think micro-cap oriented funds are riskier than most individuals need. To put some numbers around it, the average annualised standard deviation of the funds we track with greater than 50% micro-cap exposure over the past three years is 11.7% (Marlborough UK Equity Growth weighs in at 13.4%, whilst the New Star offering stands at 11.3%) . In contrast, the sector average over the same period is 9%.
The Premier offering has been horrid, but now that it has been handed to Castlefield (of which Premier owns 30%), we’ll have to see if they can resurrect it. One thing that will need to be addressed if the fund is to be worth owning even if it does improve: costs. Premier estimates that UK Alpha’s total expense ratio (TER) will be a hefty 2.90% per year. That’s nearly 3% off the top of your annual returns, an amount that is nearly impossible for any long-only equity manager to overcome in the long-haul, and is just a silly fee to pay for UK equity exposure. The Premier offering is not alone: there are a handful of funds charging north of 2% per year for their services in the UK All Companies Sector. Whether this is due to the lack of efficiency in managing small asset bases, the layering on of fees at funds of funds, or just plain greed, it still hurts investors.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
