Royal London UK Smaller Companies added to Wealth Shortlist

Royal London UK Smaller Companies was added to our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential on 25 March 2022.

The fund aims to deliver long-term growth by investing in some of the smallest companies in the UK stock market. Smaller companies typically have more room for growth than larger ones, though they’re more volatile and higher risk.

Growth is the overarching style of the fund, which means the managers focus on companies with long-term earnings growth potential. They also consider valuation meaning a company’s share price should be lower than its future earnings suggest it should be. This investment approach is ‘GAAP’ – growth at an attractive price. We think the fund could add diversification to the UK portion of a more adventurous portfolio, or one focused on larger, more established businesses. Its growth focus could also complement other investments in out-of-favour value companies.

Henry Lowson, the fund’s lead manager, has spent his investing career focused on UK small and medium-sized companies. He joined AXA Framlington in 2005 where he was mentored by veteran UK investor, Nigel Thomas. He joined Royal London in September 2016 and became lead manager of the Royal London UK Smaller Companies fund.

He’s supported by Henry Burrell who was appointed deputy manager in January 2020 after joining Royal London in 2017. He entered the industry in 2011 on the Smith & Williamson graduate scheme and has covered UK multi-cap equities throughout this time. We believe he’s well aligned with Lowson’s investment approach with a focus on generating returns with an appropriate level of risk.

We hold Lowson in high regard and believe he’s a passionate, considered and highly experienced smaller companies’ investor, with the potential to deliver attractive returns over the long term. Burrell has also impressed – he’s driven and has worked closely with Lowson since joining the team. That said, our conviction mainly lies with Lowson who is the more experienced of the two.

As part of our analysis, we pay close attention to liquidity, especially when it comes to smaller companies as they tend to be less liquid – which means they can be more difficult to buy or sell. We believe the managers take a conservative approach in terms of risk management and liquidity, which supports our internal analysis.

Following a detailed review of the sector and several meetings with the managers, our conviction has grown, and we recently added the fund to the Wealth Shortlist. Lowson has built a good track record, supported by his stock-picking ability according to our analysis but do remember past performance is not a guide to the future. We feel the managers’ interests are aligned with investors, based on their incentivisation and the fact they both have significant personal investments in the fund. We are positive about the fund’s long-term prospects, though there are no guarantees.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2022.

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