Schroder UK Dynamic Smaller Companies – under new management

Heather Ferguson | Wed 22 November 2017

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• New manager Luke Biermann invests in a similar way to the previous managers so the fund has not changed dramatically under his leadership
• Manager favours unique businesses that are difficult to replicate, such as Fever-Tree
• Manager needs to build a longer track record before the fund can be considered for the Wealth 150

Our view

We removed the Schroder UK Dynamic Smaller Companies Fund from the Wealth 150 in June this year following the announcement that Paul Marriage and John Warren, the fund’s previous managers, were to leave Schroders. Luke Biermann joined the fund at this time and worked alongside the existing managers until their departure in September, at which point he become the lead manager on the fund.

Over the past five years Luke Biermann has co-managed the Schroder European Smaller Companies Fund. The fund has performed well over this time, and our analysis suggests value has been added though the managers’ good stock selection. However, he has no prior experience managing a fund alone, or a portfolio dedicated to higher-risk UK smaller companies and we would prefer he builds a longer track record in order for us to assess his abilities in this regard. We therefore do not feel the fund currently warrants a position on the Wealth 150 list of our favourite funds across the major sectors, but we will continue to monitor performance and inform investors if our views change.

Investing in smaller companies is higher-risk as they are more prone to failure than their larger counterparts. The manager also favours a concentrated portfolio, which means each holding can have a greater impact on returns, but increases risk.

Portfolio review

We recently met with Luke Biermann. He feels his philosophy for managing the fund is very similar to that of Paul Marriage and John Warren’s, and therefore doesn’t expect the way the fund is managed to change dramatically under his leadership. Like the previous managers, he seeks to invest in a company when it is small and hold onto it as it grows into a larger and more successful company. At this point, the manager typically takes his profits and sells the company in order to reinvest into the next smaller opportunity – although he is able to hold up to 20% of the portfolio in larger companies, so will occasionally run his winners into this allowance.

He seeks unique businesses he believes are not easily replicated. He therefore tends to avoid the many ‘me too’ smaller businesses that have copied a good idea, but which have very little differentiation from their peers. He places particular focus on a company’s resilience, favouring those with captive customers, recurring sales and an easily defended position as market leader. As senior management drive the strategy and direction of a smaller business Luke Biermann also values management with high personal investment in the company, as they are most likely to emphasis generating shareholder value.

Premium drinks maker Fever-Tree is an example of a company that currently meets these criteria. Although there have been a number of ‘me too’ companies established over the past few years, none have been successful at de-railing its success. Fever-Tree is in a rare position in that it is supported along the whole supply train; the bottling company owns a share of Fever-Tree, so is motivated to help the company succeed; and bars earn a higher percentage on the sale of Fever-Tree than they do on the competition, so afford its products greater and more prominent shelf space. These factors make it very difficult for the competition to gain a foothold.

Although the fund invests predominantly in the UK, the manager has the flexibility to invest up to 20% of the portfolio overseas. This portion of the fund currently includes Xing, a German business and employment-oriented social network similar to LinkedIn, which is another good example of the type of company Luke Beirmann looks for. The business seeks to help HR personnel find people with the skills they need. Unlike much of the competition, like LinkedIn for example, the website is written by Germans, for Germans, rather than translated from English, which the manager feels gives the company a competitive edge. The business stores a lot of data on its users, which they use to create features people want. These additional features then allow the business to charge higher subscription fees.

The fund has changed very little since Luke Biermann began managing the portfolio, although he has added a number of investments, funded through the sale and re-sizing of a few existing positions. Games Workshop is one of the new additions to the fund. The company is under researched, according to the manager, as the CEO doesn’t visit the City to meet with analysts very often. This means other investors have underestimated the potential growth opportunities presented by the company’s new use of YouTube and other social media advertising. Ten Entertainment is another addition. The company buys small independent 10 pin bowling alleys, and installs new equipment and more professional management. In doing this, the company has been successful in generating much higher returns.

Past performance is not a guide to future returns.Source: Lipper IM to 31/10/17

Find out more about this fund including how to invest

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