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A UK equity fund which is managed according to a growth-orientated, small and mid-cap focused approach. It is flexibly managed across a diversified portfolio of both 'growth' and 'yield' stocks. Within its sector, the fund features in our 'Income and Growth' category.
The fund’s KIID Synthetic Risk and Reward Indicator (SRRI) is 6. This is a regulatory measurement that is, where possible, calculated from the volatility of its weekly performance over a five-year period. A score of 6 means the fund’s historic volatility is between 15% and 25%.
The fund features in the UK All Companies sector but aims to offer a yield premium to the market. It’s risk score is in keeping with that of mainstream UK All Companies funds. The fund’s risk/return profile is likely to differ from funds managed with a more traditional, larger-cap approach to income investing. Specifically, for this fund, the environment for small and mid-cap stocks will be an important driver of its outcome, as will its growth-biased style. These characteristics have the potential to generate bouts of higher relative volatility. Different share classes could have differing SRRI scores.
The fund is co-managed by Charles Montanaro and Guido Dacie-Lombardo. Mr Montanaro founded Montanaro Asset Management in August 1991 and the firm is dedicated to pan-European small and mid-cap investing. He has built a sizeable and multi-national team of specialists and they manage a range of funds and mandates.
The team believes that smaller company markets are inefficient and that an original, proprietary research process can provide a significant information advantage. At heart, they are growth investors, but by combining growth stocks and yield stocks in this fund, they seek to deliver income and the opportunity for strong returns over a multi-year period. In this way, they believe that investors are able to benefit from the ability of companies to grow, as well as their potential to deliver robust dividend progression.
The fund is reasonably concentrated, typically featuring 40-50 holdings, with the team seeking to achieve a balance between yield and growth stocks. They will hold low income stocks, but they typically reduce the size of a holding when its yield drops below 1.5%. The target stock weighting is 1%-3.5%, with positions reduced if they reach 5%. While the fund is permitted to invest up to 20% in Continental European equities, the team will not typically invest more than 10%. Risk is seen primarily in the context of the risk inherent in a company (business, balance sheet, management, valuation).
The investment process is predominately bottom-up in nature but is managed with an understanding of the macro-economic backdrop and how this might impact upon a company's prospects. The analyst team produces an "Approved List", which identifies well-managed, high quality companies with safe and growing dividends that they believe are best placed to take advantage of key industry themes. They screen the universe on size (investments typically have a market cap between £100m and £10bn), liquidity and a range of other metrics, producing a "Quality" rank. Company meetings are a critical part of the process and strong emphasis is placed on the quality of management, given the importance of strong leadership in the success or failure of smaller companies. After further qualitative work, the responsible analyst presents the company to the Investment Committee for challenge.
Once stocks are approved, the analysts build financial models and value the stocks. They discount future cashflows and believe that cash return on investment is the best indicator of future capital allocation, which drives growth and supports the valuation case for a "Quality" company. A target price is then established and adjusted through time on the basis of company performance and market conditions.
Formal documentation, including the fund prospectus and the KIID, should be sought directly from the asset manager. For ease of reference, a link to the ASSET MANAGER WEBSITE can be found above, as well as a link to the ASSET MANAGER FACTSHEET.
At The Adviser Centre, our primary aim is to support financial professionals in their fund selection and suitability work through independently-minded research, borne of decades of industry experience. Our process is framed by the fundamental concepts of “quality”, “value” and “utility”, through which we answer the key questions of why to invest in a fund, how it is likely to behave and how it can be deployed.
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