The only fund to hold roughly half its portfolio in its top 10 holdings and deliver top-quartile returns over the last five years is the tiny £16.6m Henderson UK Strategic Income fund, managed by Paul Craig.
We looked at funds with the highest percentage of assets in their top 10 for the purposes of the study.
Source: FE Analytics
Among those funds which have trailed their peers are the Invesco Perpetual Income and Invesco Perpetual High Income funds, previously run by investing legend Neil Woodford.
The funds have recently been taken over by FE Alpha Manager Mark Barnett after Woodford left this month.
These funds have a stellar long-term track record, but the sheer size of the portfolios means they have been invested in massive chunks of the UK’s largest companies, naturally giving the funds a more defensive tilt.
However, the £13.5bn Invesco Perpetual High Income fund is set to leave the IMA UK Equity Income sector today as the firm said it wanted to alleviate the three-year yield requirement the IMA imposes on the sector.
The highest conviction fund in the sector, with a whopping 62.01 per cent invested in the top 10 holdings in the portfolio, is the SJP UK High Income fund, which Woodford still manages.
The fund has underperformed the IMA UK Equity Income sector by 17 percentage points over the last five years, with returns of 100.18 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund delivered bottom quartile returns in 2009, 2010 and 2012 and second-quartile returns in the strong markets of 2013, though it did outperform the FTSE All Share and IMA UK Equity Income sector that year.
The future of the fund is somewhat uncertain. SJP has said Woodford continues to manage the portfolio, but they have been reviewing the mandates since the manager announced his departure from Invesco last year.
However, investors who think markets are due a hiccup could see fortunes change for the defensively positive portfolio – and the same could be true for other managers with a similar, defensive style such as Troy’s Francis Brooke on his Trojan Income portfolio.
Woodford’s SJP fund, for example, fell only half as far as other funds in the sector and index in the crisis year of 2008 and delivered positive returns in the down markets of 2011.
Performance of fund vs sector and index in 2008
Source: FE Analytics
So far this year, the fund is up 3.32 per cent. The FTSE All Share has lost 0.53 per cent while the sector is up just 0.32 per cent, according to FE Analytics.
However, a number of other portfolios that sink a large portion of their capital into their top-holdings are serial underperformers.
The Elite Charteris Premium Income fund, for example, holds 51.2 per cent of its assets in the top-10 and has been sitting in the bottom-quartile over the last one, three, five and 10 years.
The same is true of the Scottish Widows UK Equity Income fund, which holds 47.2 per cent in the top-10. The UBS UK Equity Income fund, which has 53.3 per cent in the top-10, has also tended to trail its peers over the short, medium and long-term.
Another high-conviction fund which could fare well if markets shift is the five FE Crown rated Threadneedle UK Equity Alpha Income fund, headed up by FE Alpha Manager Leigh Harrison.
The fund holds 45.7 per cent of the portfolio in its top-bets, ranking it in 10th place alongside the BlackRock UK Income portfolio.
The fund managed to harness the market rally in 2012 and 2013, but historically, it has protected well on the downside, delivering positive returns of 1.39 per cent in 2011 and holding up better than the sector and index in 2008.
Over the last five years, the fund has beaten both the market and FTSE All Share, returning 129.09 per cent, though these returns fall into the second-quartile relative to peers.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has ongoing charges of 0.88 per cent via Trustnet Direct.
On the other hand, the best-performing fund in the sector over the last five years has been the five crown rated Unicorn UK Income portfolio, run by FE Alpha Manager John McClure.
The fund sits in the middle of the road in terms of conviction, with 40 per cent invested in the top-10 stocks.
However, the manager’s propensity for small and medium sized companies has helped this fund surge ahead on the performance tables, more than doubling the returns of the sector and index over the last five years with returns of 317.67 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, the same reason the fund has outperformed in the recent rally is what would cause it to slam on the brakes if markets corrected. In 2011, McClure’s portfolio fell nearly twice as far as its peers and further than the index, shedding 4.89 per cent.
However, it has held up well in volatile markets so far this year. Year to date, the fund is up 3 per cent. The fund has ongoing charges of 0.82 per cent via Trustnet Direct.
