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Is this the best fund you’ve never heard of?

It has no website and does no marketing. Yet Simon Knott's UK smaller companies fund has outperformed its peers.

 
Is this the best fund you’ve never heard of?

‘We don’t market ourselves. We don’t market the fund. We rely on my performance,’ says fund manager Simon Knott.

In fact at a time when the major asset management companies are scrambling to drench every corner of the World Wide Web with their branding, not to mention billboards around the country, the nearly 50-year-old Discretionary Unit fund has no website.

But Discretionary's UK smaller companies fund is beating most of its better-known competitors: in the past three years the fund has returned 130% against a 47% return on the FTSE Small Cap index.

The performance of the £29 million fund has helped Knott to a Citywire AAA status. This is the first time in almost seven years that Knott, who has managed the fund for 22 years, has managed this highest of Citywire ratings.

With little online presence, who invests in the fund? ‘We have a wide range of investors from IFAs and individuals to people who’ve inherited their units from parents or even from grandparents,’ says Knott.

Knott explains the fund’s resilience: ‘It has been a good period for UK smaller companies. I was in the right place coming out of the banking crisis and being in a lot of good companies that were over-sold in the banking crisis.’

Thereafter Knott attributes the fund’s performance to individual companies, of which he sticks to about 30 in what he calls a ‘tight portfolio’: if you’re picking good companies, why not invest large amounts of money in them, he says. 

Knott describes himself as a ‘deep value investor’ who engages in ‘completely bottom up stock picking’ and holds onto them as long as they continue to perform. He dismisses questions about the difficult economic backdrop provided by the unpredictable eurozone crisis.

‘Tough markets are in a sense good for me because I’m able to find value.’

‘At end of the day it’s not about the macroeconomy [but rather] proper macroeconomic analysis of companies that I’m invested in. If you’re buying good smaller companies you can normally buck macroeconomic trends.’

Knott also runs a UK smaller companies investment trust, the Rights & Issues Investment Trust , which is also a top performer among its competitors. This forms the largest holding in the Discretionary Unit fund, some 8% of it.

The second biggest holding after the investment trust is Brammer (BRAM.L), the supplier of industrial maintenance, repair and overhaul products. This makes up 7% of the fund.

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29 comments so far. Why not have your say?

LouisV-W4

May 31, 2012 at 09:17

This is a pretty good marketing campaign!

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Jonathan

May 31, 2012 at 09:39

How do we know it's not a ponzi scheme?

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Matthew Hill

May 31, 2012 at 10:28

And here is the problem with Citywire ratings. 22 yrs yet now, because he has strong performance over a short period, he is in the AAA club. Why is he a better manager than 3 yrs ago?

Past performance is....

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Jonathan

May 31, 2012 at 10:39

Reminds me of the only time banks start selling stock market tracker funds is when the market is at a peak.

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brian adams

May 31, 2012 at 16:32

Entitled to your opinion Jonathan,but remember opinions are not facts.e.g.when Money Observer brough out its 30 year edition in 2009 it listed the best performing investment trusts and unit trusts over that 30 year period.Rights&Issues was 2nd best IT with 7,506%.BEST UT was up 6,122%.For direct comparison 2nd UT was up 5,474%.Even more impressive S&P 500 up2,774%,FTSE All-share 2,367,MSCI World 2,133. Still going strong,must be one hell of a Ponzi scheme!

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Em

May 31, 2012 at 16:34

I've seen those tables - this year's star is next year's dog etc etc

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brian adams

May 31, 2012 at 16:52

Yes Em that's often the case and gamblers chartists etc may not like it,but it has little relevance to investors.

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Jonathan

May 31, 2012 at 17:23

brian adams,

This is the thing I don't like, picking and example of a fund that has done well. If there are 1000 funds picking stock totally at random 50% of them will do better than average after 1 year. After 5 years 50% of them will have done better than average and over 3% of them (30 funds) have done better than average every year for the every year of the whole 5 years. Now if you were to pick one of these 3% of funds that has done well you are no more likely to make money on it than picking any of the other 1000 funds. But you will find people extolling the virtues of the machine that generates random numbers about how fantastic it is.

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John Osborne

May 31, 2012 at 19:09

Jonathon, Matthew,

You are a miserable lot. Citywire features an excellent fund run by one of the City's long-term professionals who does not self-promote or produce pages of misleading rubbish like the other well known retail groups, and all you do is carp. Simon Knott would be quite offended if he knew you suggested his fund was a Ponzi sheme.

If you have not heard about Discretionary then you need to do more research.

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Jonathan

May 31, 2012 at 19:48

John , where there's a tip there's a tap.

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John Osborne

May 31, 2012 at 20:10

Jonathon, haha, I see you are a born sceptic.

Of course, he is not doing it for nothing but then very few people can offer services for nothing.

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Jonathan

May 31, 2012 at 20:19

come on now John, don't you think the whole article reads like an advert?

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AlJolson

May 31, 2012 at 20:23

Take a look at his 5 year performance- it is only just ahead.

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John Osborne

May 31, 2012 at 21:53

Jonathon,

No. It read to me as their reporters research and analysis,

in my opinion Chris has written a good article to draw us private investors attention to a little known higher performing fund. If it sounded like an advert then could it not be due to the merits of the fund?

Perhaps Citiwire would comment if their article was intended as an advert.

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Chris Marshall (Citywire)

Jun 01, 2012 at 08:54

Hello all. I certainly did not intend the article as an advert!

We try and interview all managers who are AAA rated. The article merely states facts relevant to that rating and to the investor.

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Matthew Hill

Jun 01, 2012 at 11:05

John Osborne. I think "experienced" rather than miserable.

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brian adams

Jun 01, 2012 at 15:31

This is getting weird.What system of maths are you using Jonathon?"If there are 1000 funds picking stocks totally at random 50% of them will do better than average after one year." FIrstly i would hope that not all managers pick totally at random in which case what follows in your thesis is irrelevant. But much more importantly it is perfectly possible for 0.1% of the funds to better the average and 99.99% to be below average after one year.

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Jonathan

Jun 01, 2012 at 16:15

brian adams, It's statistics,

The average I was talking about is the average of the group of stocks you are investing in. If you toss a coin 1000 time it is possible to get 999 heads and one tail (the equivalent result to what you have stated) but it's not probable. Try it and when you've achieved it come back and i'll give you a case of champagne, in fact I'll give you can have my house if you do it. If you could toss a coin every second it would take you almost a googol cubed years to do that (yes that's 1 with nearly 300 zeros after it). A number that's incomprehensible to humans so I don't expect you to be able to even imagine it.

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brian adams

Jun 01, 2012 at 20:41

This just gets worse.tossing coins has no relevance.I already pointed out your mistake.We are not discussing a totally random process. If you don't understand this ,fine. Warren Buffett has already pointed out the fallacy in your argument in a talk at Columbia Univ in 1984. The fact is that there are some managers who have records of beating the average i.e.your 50% on a fairly consistent basis.This is why if you do your research thoroughly you have a better than average(your 50%) chance of making money,whereas if you pick totally randomly you don't have a better than 50% chance,as you already know.Now do you see the fundamental and crucial difference?

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Bob saxton

Jun 01, 2012 at 22:43

My head hurts

Bob the elecctrician

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Jonathan

Jun 02, 2012 at 00:35

Brian, Look all managed funds have an analyst analysing where to invest the funds. Yet the odd thing is that about half of all managed funds do worse that a tracker fund in the same group of shares and about half do better. I agree with you that some funds for example one managed by Warren Buffet would do better, but Warren Buffets are few and far between. Now, how do you explain that on average managed funds do no better than tracker funds of similar stock types? A simple explanation would be that funds are managed in reality no better than a random number generator.

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banjofred

Jun 02, 2012 at 10:42

I thought I would check this one out, but immediately noted last accounts 2010 (I hate it when thesef unds dont keep info up to date - makes me think they are hiding something)

and thye invested in THORNTONS AND CLINTONSCARDS, which must have been the most stupid investment of last year???

They are also in John Menzies... is that a sparkling performer??

The fund dropped 70% in 2009, which must be amongst the top fallers? over past 5 years it wou dhave lost you 30% overall

over the last 12 months it shows a 6% loss, and in last 6 weeks has fallen 6.5%

there is an upfront cost, whihc hl dont fully discount, Hl charge a platform fee

Overall, I wont be going for this one, and start to wonder about Citywire Money in recommending dogs like this??

banjo

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Bernard Bedford

Jun 02, 2012 at 11:12

You could do worse than read Monkey with a Pin (that's one investment strategy) by Pete Comley which is downloadable free. It's researched and referenced.

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Mark Owen

Jun 02, 2012 at 11:16

Brian,

You need to give Jonathan a break - his logic is sound. Alas, I've seen this argument played out a million times on citywire bulletin boards, and there's always a couple of people who want to have a sparring match over it. By writing this post, I appreciate that I'm essentially joining in. However I'm only going to write one post.

As a backdrop to a private individual's investment in funds, we have to remember that we are essentially investing in just another asset. If you want to look at it this way, we are ultimately running our own investment companies, selecting our own funds and shares. A good fund should be viewed just like a good company. The combined brains of the management of the fund or the company will be partially responsible for an outperformance. The question is, are _we_ clever enough to spot that good fund? In this role, we surely wouldn't select a fund by looking purely at past performance. Or would we? I suspect most people do.

This argument that Brian and Jonathan are having reminds me of the kind you'd expect to see between a scientist and someone who believes in God. And possibly that's why the arguments will never cease.

On the one hand, Brian believes that some people are cleverer than others - something which we can all probably agree on. He probably believes that this means that these managers will be able to hunt out better returns by investing more smartly. This may also be correct. But: Is it scientifically testable? This all comes back to the efficient markets hypothesis, which is itself a hot topic of debate. Suffice it to say, that it has not been scientifically demonstrated to be either true or false. For this reason, I'd liken Brian's argument to that of someone who believes in God.

Jonathan, on the other hand, is taking the side of the scientist who is trying to explain to Brian a simplified version of the economy by using a coin tossing example. What he's saying is perfectly correct and testable, but he's also losing the argument because the world isn't a coin tossing experiment.

Face it guys. Neither of you is going to win this argument and more than a believer and an atheist. You'd be better off just following your beliefs and getting a bit more fresh air.

On that note, I'm offski.

Mark.

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Rightcharlie

Jun 02, 2012 at 11:44

Averages, statistics, reversals in the performance tables etc., etc. Well on this line of thinking forget these boring funds and back this year's star poor perfmormers. Previously managed by Mr Winifrith - who is now sacked - and under new management, maybe this year's bottom could be next years top!!!

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brian adams

Jun 02, 2012 at 18:01

Thanks Mark,as a scientist I was trying to make Jonathan see that the world isn't like a simple coin tossing experiment,as you pointed out.The problem Jonathan has is that he changes the goal posts. He points out the poor chances of a coin tossed 1000 times giving 999 heads and 1tail but then to avoid giving me his house this random process becomes,by magic,totally deterministic i.e.I have to toss the coin some googol cubed number of years because I am only allowed to achieve the desired result on the last try.Guess what,I gave it a go.Beginners luck I suppose! But that's statistics for you.Anyway Jonathon the good news is that I don't like champagne so have a drink on me. The standard explanation for the difficulty fund managers have in beating the market is that for practical purposes the collection of funds is the market.So I agree it is difficult to find a manager who consistently beats the market over an extended period,but there are some and that was all I wished to say.As Mark said "enough" I'm off for my daily run now.

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Jonathan

Jun 02, 2012 at 19:25

Brian, Yes, fund managers don't, to my knowledge, close their eyes and stick a finger on a stock to decide which one they buy. But can they spot future value in shares better than the market already has? Most shares are worth more than their current dividend would indicate as they are valued on future growth, something that has already been factored into the share price by the market. So the manager has to spot something the market hasn't already spotted. The end result is that the performance of managed funds is no better than randomly selected funds from the same market. It is interesting to see how they compared to a similar number of funds that have been managed by a random number generator. How about this as a measure of how good funds really are: Take the top 30 performing funds one year, then take the exact same funds the next year and see how they have all fared. You would be surprised at the results and fund managers would find it hard to justify their commissions. So it's something the financial markets don't like to measure.

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john brace

Jun 04, 2012 at 11:19

I don;t get it - rights and Issues IT is down 45% over 5 years ans Discretionary not much better

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Jonathan

Jun 04, 2012 at 11:51

Brian, after a quick bit of research the facts are worse than i described. The average returns of managed funds are less than tracker funds. The main purpose of managed funds is to pay a large salary to a fund manager and his associated company.

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