Investors should be tilted towards UK smaller companies and value plays to make the most of a rally from last week’s general election, according to FundCalibre managing director Darius McDermott. 
The general election on 12 December saw the Conservative party win a significant majority, thereby opening up the way for prime minister Boris Johnson to push through his Brexit deal and ease some of the political uncertainty that has clouded investor sentiment for much of the recent past.
McDermott (pictured) said: “The UK stock market is likely to rally now, as will the pound, as confidence returns. Domestic-facing businesses and smaller companies in particular should do well.
“In contrast, the larger overseas earners in the FTSE 100 may suffer a little due to the currency reversal. However, this may be mitigated in time by overseas investors returning to our shores and once again investing more broadly in the UK stock market.”
Below, McDermott highlights three funds that investors could consider now the Conservatives have a majority government.
Fidelity Special Values
McDermott’s first pick is the Fidelity Special Values investment trust, which he described as “a prime candidate for value investors looking to tap into the unloved UK market”.
The £842.1m trust is headed up by FE fundinfo Alpha Manager Alex Wright, who also runs the £2.9bn Fidelity Special Situations fund and made his name with a strong bout of performance on the £351m Fidelity UK Smaller Companies fund.
Performance of trust vs sector and benchmark under Wright
Source: FE Analytics
“A contrarian investor, Wright targets companies which are exceptionally undervalued as a way of preserving capital as well as those where he feels there is a catalyst for growth in earnings,” McDermott said. “These catalysts can take many forms, such as a change in economic conditions or a change in management.”
Since Wright took over the trust in September 2012, it has generated a 194.72 per cent total return – outpacing its average IT UK All Companies peer and FTSE All Share benchmark by a significant margin in the process. It has underperformed over one and three years, however, as investors shied away from UK domestics and value stocks.
The trust is underweight FTSE 100 names, which might lag if sterling continued to rise, and overweight mid- and small-caps, which would be expected to outperform on the back of a stronger UK economy and sterling.
Fidelity Special Values has ongoing charges of 0.96 per cent, is traded on a 2 per cent premium to net asset value (NAV) and yields 2.7 pe cent. It has an FE fundinfo Crown Rating of four.
LF Tellworth UK Smaller Companies
In keeping with the likelihood that small-caps will be among the main beneficiaries of the election result, McDermott’s next fund is LF Tellworth UK Smaller Companies.
It only launched in November 2018, but is run by Paul Marriage and John Warren – two FE fundinfo Alpha Managers who have “an exceptional track record” of investing in UK smaller companies. Marriage and Warren founded Tellworth Investments in 2017 to launch this fund, having previously worked together on portfolios such as Schroder UK Dynamic Smaller Companies.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Since inception, it has made a 16.24 per cent total return, which puts it in the top quartile of the IA UK Smaller Companies sector. It’s also top quartile for annualised volatility, maximum drawdown, Sharpe ratio and maximum gain.
“Marriage and Warren look for companies with a differentiated product, high margins, company management aligned with shareholders, and a market leading position,” explained the FundCalibre managing director. “These companies will make up 75 per cent of the portfolio, with the remainder allocated to value opportunities like self-help stories.”
Top holdings include camera product designer Vitec Group, video game developer Codemasters, financial management software firm Aptitude Software, residential care home operator CareTech and logistics company Wincanton.
LF Tellworth UK Smaller Companies has an ongoing charges figure (OCF) of 1.30 per cent
LF Gresham House UK Micro Cap
McDermott’s final fund to consider looks at very bottom of the UK market capitalisation spectrum: LF Gresham House UK Micro Cap. This £191.8m fund resides in the IA UK Smaller Companies sector and has Ken Wotton as lead manager, with Brendan Gulston as deputy.
“This fund leverages off a wider team of some 50 investment professionals to take advantage of its private equity expertise to invest in some truly unexplored areas of the market,” the fund picker added.
“The fund invests in around 50 very small companies and manager Wotton will hold successful investments as they grow in the future. He also avoids high-risk sectors such as oil, mining and property.”
Performance of fund vs sector since launch
Source: FE Analytics
Some 65 per cent of the portfolio is invested in companies listed on the AIM, including top-10 holdings like security provider Knights Group, sustainable investing specialist Impax Asset Management and contract research specialist Ergomed.
Since launch in May 2009, the fund has made a total return of 358.68 per cent – although this puts it in the third quartile of the peer group. It is in the top quartile over three and five years, however.
LF Gresham House UK Micro Cap has a 0.98 per cent OCF and holds five FE fundinfo Crowns.