Cynics will point out that the UK market could well have seen the best of the recovery already, however, with the consensus being that UK equities will struggle to match last year’s stunning performance.
Performance of index in 2013
Source: FE Analytics
However, investors are overweighting developed markets such as the UK at the moment as the emerging world struggles.
For anyone who is concerned about the recent wobble on the FTSE, examining how funds performed in previous corrections could be instructive.
The two most recent significant setbacks have been the 2011 market correction and the sell-off following the talk of “tapering” QE last year. Our data shows that very different funds did well in each of those periods.
FE Trustnet looked at the IMA UK Equity Income sector in a recent article.
The FTSE lost 18.17 per cent between 7 July 2011 and 4 October 2011, according to FE data, and no funds managed to make money in that time.
Surprisingly, the best result was from the much-maligned Manek Growth. The fund, run by the winner of a newspaper competition, lost only 0.01 per cent during the period, although it finished the year down 35.49 per cent.
The fund is really a law unto itself, however, and has an extremely low negative correlation to the market over the past three years of -0.1, meaning that only 1 per cent of its movements can be explained by the direction of the FTSE.
Having 39 per cent in the US in breach of sector guidelines may have contributed to this, as has some odd stock selection – Manek has been a holder of RIM, maker of Blackberry, for some time.
Unsurprisingly, the fund has been shrinking rapidly over the years, although there is still £19.6m in it, according to our data. It also appeared at the top of the best performers' list in the 2013 sell-off.
Manek aside, the fund to have performed the best in the down period was JOHCM UK Opportunities, which now has five FE Crowns and is £1.2bn in size.
FE Alpha Manager John Wood and Ben Leyland’s portfolio bumped its cash weighting up to around 10 per cent during this period, our data shows, which will have cushioned it from falling equity markets.
The portfolio is a favourite of the FE Research team, making it on to the FE Select 100 list, and the analysts note that it concentrates on companies that derive their earnings from overseas, and has a strong tendency to outperform in falling markets.
The analysts warn that Wood has raised his cash weighting to its maximum once again in early 2014, and are tipping the fund as one that should protect more effectively in down markets.
R&M UK Equity Unconstrained did almost as well as the JOHCM fund in the 2011 slump, losing just 10.36 per cent.
It is a very different fund altogether, and only £12.4m in size – although it too has five FE Crowns.
The portfolio, run by Daniel Hanbury, has much more of a multi cap approach, with 30 per cent in the FTSE 250 and 14.1 per cent in AIM.
This has helped it outperform the JOHCM over the past three periods when small and mid cap companies have had such a good run.
Performance of funds vs sector and index over 3yrs
Source: FE Analytics
By contrast JOHCM UK Opps retained a very defensive position last year, focusing on preserving capital but still managing to marginally outperform the benchmark.
Jupiter UK Special Situations lost just 11.73 per cent during this period and Neptune UK Mid Cap 12.57 per cent, despite being invested in a more volatile area of the market.
Source: FE Analytics
Neptune UK Mid Cap also appears on the list of the best-performers in last year's market slump.
Between 22 May and 25 June 2013, the FTSE lost 10.19 per cent as fears of the effects of the US Federal Reserve reducing bond purchases hit markets.
Neptune UK Mid Cap lost just 3.27 per cent in this period, behind only Manek Growth and Unicorn Free Spirit, the latter losing 2.39 per cent.
Among the other top-performers was the relatively new Premier ConBrio Sanford Delaney UK Buffetology fund. In an article last year, FE Trustnet spoke to the manager about how he applies Warren Buffett’s philosophy.
One trend we highlighted in the first article in the series was that multi cap funds did better in the 2013 market slump thanks to their greater domestic bias.
The sell-off last year hit emerging markets the hardest and was a blow to the globalised economy, meaning that UK large caps were particularly exposed.
Further down the market spectrum, companies are more insulated from such concerns, more dependent on an improving UK economy, and are able to take market share from other companies.
The same trend seems apparent in the list of the top-performing UK growth funds over the same period.
Source: FE Analytics
Unicorn Free Spirit, MFM Slater Recovery and CF Miton UK Value Opportunities are all focused on the mid and small cap areas of the market.
The question for investors who want to protect themselves is what sort of slowdown they expect next.
With emerging markets continuing to suffer as the Fed tapers quantitative easing, and UK smaller and mid cap companies doing well in a down period for the overall market since the start of the year, this dip seems more like 2013's than 2011's.
