It may come as a surprise to some given countless concerns about a double or even triple dip recession, but FE Analytics data shows that over the last five years, six of the top-10 performing open-ended funds are UK focused.
Number one on the list is FE Alpha Manager Alex Wright’s Fidelity UK Smaller Companies fund, with Standard Life UK Equity Unconstrained and Unicorn UK Income also scoring highly.
Top 10 performing IMA funds over 5yrs
| Name | 5yr returns (%) |
|---|---|
| Fidelity - UK Smaller Companies | 241.27 |
| Legg Mason - Japan Equity | 204.34 |
| Stan Life Inv - UK Equity Unconstrained | 176.02 |
| Aberdeen Global - Asian Smaller Companies | 173.86 |
| Unicorn - UK Income | 171.77 |
| AXA - Framlington Biotech | 162.69 |
| Lindsell Train - CF Lindsell Train UK Equity | 161.03 |
| Cazenove - UK Smaller Companies | 157.47 |
| FF&P - European All Cap Equity | 151.07 |
| Cazenove - UK Opportunities | 148.96 |
Source: FE Analytics
Legg Mason Japan Equity is the only other fund than these that has returned more than 200 per cent over the last five years, and the only non-UK portfolio. Its place at the top of the list is thanks largely to the fund’s stellar run in 2012 and 2013.
Aberdeen Global Asian Smaller Companies is the only emerging market-focused fund to make it into the top-10. AXA Framlington Biotech and FF&P European All Cap Equity complete the list.
Gavin Haynes, managing director at Whitechurch, says the dominance of UK equities shows that investors who want high returns shouldn’t necessarily concentrate on macroeconomics.
“This shows that equity markets and the domestic economy are very different entities and have little correlation,” he said.
“It has very much been the case that there have been exceptional opportunities out there for investors."
Since March 2009 UK equity markets have shown a very strong recovery and those managers that have been brave enough to take a higher degree of risk have been well-rewarded,” he added.
The standout performer on the list is by far the £311m Fidelity UK Smaller Companies fund."
As well as topping the performance tables over five years, it has also been the third best performing IMA fund over three years with returns of 128.07 per cent.
Wright takes a bottom up, deep-value approach to investing whereby he buys out of favour stocks and holds them until they are re-rated by the market. In order to protect current investors from the vast amounts of money going into the fund, it was soft-closed earlier this year.
The other IMA UK Smaller Companies fund to feature on the list is Cazenove UK Smaller Companies, headed up by FE Alpha Manager Paul Marriage. The five crown rated Unicorn UK Income fund, which is headed-up by FE Alpha Manager John McClure, also focuses on the lower end of the market.
Andy Merricks, head of investments at Skerritts Wealth Management, says the fact that UK funds dominate the list proves that investors should concentrate on the expertise of the manager they invest in, instead of purely picking an area of the market they want to be exposed to.
“I’m surprised it is that top heavy,” he said.
“However, I think it proves that investing in stockpickers is better than passive investing. I’m not an evangelist on either actives or passives, but if you can find a manager who knows their companies in and out and knows when to hold and when to sell, you can find consistently high returns.”
Merricks’ comments echo those of Hargreaves Lansdown’s Mark Dampier, who pointed out in an interview with FE Trustnet last week that the likes of Giles Hargreave has consistently beaten high profile emerging market manager, even though he focuses on the UK.
Merricks says it isn’t surprising that UK small cap managers have been the best performers given they have the potential to add more value than their large cap rivals; however, he issues a word of warning for investors looking to part with their cash now.
“The big problem with smaller company funds can be liquidity,” he said “If we were to roll forward another five years, I would be surprised if the smaller company funds that are at the top of the sector tables now will still be there.”
Merrick’s also anticipated Ed Legget’s Standard Life UK Equity Unconstrained fund would feature high up on the list. He is a big fan of the fund, though he says new investors should understand the risks involved with such a high-risk portfolio.
“The performance has been very good, but only if you can handle the volatility. That can be the big problem but you just have to hold your breath and stick with it,” he said.
Though Standard Life UK Equity Unconstrained has been the best performing fund in the IMA UK All Companies sector over five years, investors have had a very bumpy ride.
In 2008, the fund lost 41.05 per cent – more than 10 percentage points more than the FTSE All Share. However, as markets rebounded in 2009 the fund capitalised and returned 99.17 per cent, meaning it nearly tripled the returns of the sector.
Performance of fund versus sector in 2009
Source: FE Analytics
However, Merricks points out that liquidity could well turn into an issue for the Standard Life fund, too.
“How long that level of performance can continue, I don’t know. However, those sorts of returns will be virtually impossible to replicate if the fund becomes too big,” Merricks said.
Though it is primarily higher risk portfolios that have been the best performers over the last five years, FE Alpha Manager Nick Train’s CF Lindsell Train UK Equity fund came in at 7th on the list.
Train takes a bottom-up, long term approach to investing and tends to focus on large caps.
For instance, the two largest holdings in his fund are Diageo and Unilever, with a combined weighting of 18.6 per cent. Between them, the FTSE 100 stocks have a joint market cap of more than £80bn.
This style has rewarded him as his fund has been a top quartile performer in the IMA UK All Companies sector in each of the last five calendar years, which has inevitably led to very strong cumulative returns.
“Nick Train is very focused on good quality businesses that can benefit from all market conditions,” said Haynes. “He is the perfect example of a dedicated stock picker and he is a manager we hold in very high regard.”
Though Train’s CF Lindsell Train UK Equity fund is geared towards institutional investors, private investors can gain access to his strategy via certain platforms, or his closed-ended Finsbury Growth & Income trust.
Though individual UK funds top the list over five years, in terms of sector performance it has been a different story with the IMA UK Smaller Companies sector the only UK sector to feature in the top 10.
The best place for investors to put their money since 2008 has been the IMA North American Smaller Companies, IMA Japanese Smaller Companies and IMA Technology and Telecoms sectors.
Performance of sectors over 5yrs
Source: FE Analytics
However, given the fact that UK sectors are among the largest and most diverse in the IMA universe, sector averages can be slightly misleading.
Over 10 years UK funds haven’t been as dominant, particularly compared to those with an emerging market bias, which dominate the top-10.
The likes of Invesco Perpetual Latin America, Aberdeen Emerging Markets and JPM India all feature in top 10 top-performing funds over 10 years.
That said, the best performing fund over that time is a UK one – FE Alpha Manager Daniel Nickols’ five crown rated Old Mutual UK Smaller Companies Focus fund – which has returned a hefty 531.88 per cent.
Franklin UK Mid Cap and Marlborough Special Situations also feature high up on the 10 year performance tables.