The outstanding performer has been the five FE Crown-rated Neptune UK Mid Cap fund, which has made 81.97 per cent over the last three years, more than any other fund in the entire sector over that period.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
However, there are concerns that the bull-run in this area of the market is coming to an end.
Some managers such as Schroder’s Marcus Brookes say valuations are looking stretched in cyclical stocks and he’s moving toward more defensive, large-cap exposure in his fund of funds range.
Even FE Alpha Manager John McClure, who typically has a small to mid-cap bias in his Unicorn UK Income fund, has been buying large caps, citing opportunities in the IPO pipeline later this year.
In fact, there has been relative weakness in mid-cap stocks in recent weeks, as some investors have started to rotate away. Does this mean it’s time to jettison the top performing funds?
Whitechurch Securities’ Ben Willis says it’s time for investors to get out of mid-cap funds and look to areas that haven’t had such a stellar run.
“Mid-caps look really expensive at the moment. Even the mid-cap managers will say read between the lines here, we’ve had a great run,” he said.
“If you already hold the Neptune UK Mid Cap fund fine, they might outperform a bit longer, but if you were buying now, would you buy that fund? I wouldn’t.”
Willis adds it’s a good idea for investors who hold the portfolio, and other leading mid-cap funds, to take profits from the sector purely on a valuation basis.
However, he still likes UK equities and recommends moving into more large-cap focused funds like Richard Buxton’s four FE Crown rated Old Mutual UK Alpha fund or FE Alpha Manager Julie Dean’s Schroder UK Opportunities portfolio.
“Julie is more flexible, so I’d prefer her fund,” Willis said. “She’s more liable to hold mid-caps if she sees value there, but at the moment she’s positioned more in large caps.”
Willis says Buxton is more likely to stick to the UK largest companies, which could be a good option for the moment, but he likes Dean’s ability to move between market caps as she sees fit.
The five FE Crown rated Schroder UK Opportunities fund has trailed its peers in the IMA UK All Companies sector over the last year, though it has beaten the FTSE All Share over the period.
However, over the longer term the fund has trounced its peers and the index, more than doubling each measure over three years, and strongly outperforming over five and 10 years.
Over the last decade, the fund made 223.25 per cent while the FTSE All Share gained 128.9 per cent. The average fund in the IMA UK All Companies sector gained 121.1 per cent, according to FE Analytics.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Dean is making a play on oil and gas and miners in her fund, with Rio Tinto and Royal Dutch Shell listed as the top two holdings. She also holds FTSE 100 publishing giant Pearson and multinational software company Sage Group.
Buxton, who has a long track record of outperformance on the Schroder UK Alpha fund, took over the Old Mutual UK Alpha portfolio in June last year.
The fund has performed in line with its peers since he took the helm, picking up 10.02 per cent. The fund outperformed the FTSE All Share, which made 7.39 per cent over the period.
Performance of fund vs sector and index since June 2013
Source: FE Analytics
Buxton also holds Rio Tinto and Royal Dutch Shell in his top bets, but the manager also has exposure to a number of financials such as major UK banks HSBC and Lloyds as well as wealth manager St James’s Place.
The manager also holds Legal & General Group, which was hit by chancellor George Osborne’s pension reforms announced in his most recent Budget statement.
Financials are Buxton’s largest sector weighting, at 34.65 per cent, followed by consumer products at 23.15 per cent.
The Old Mutual UK Alpha fund has ongoing charges of 0.78 per cent while the Schroder UK Opportunities fund has ongoing charges of 1.19 per cent.
However, not everyone agrees that investors should ditch mid-caps. Rathbones’ David Coombs recently told FE Trustnet there was a buying opportunity in mid-cap funds, owning to a dip in performance in the last month.
The manager said he is using the slightly damped prices as an opportunity to top-up his holdings in the market cap because he thinks it will outperform in the medium-term.
Shaun Port, chief investment officer at Nutmeg, says he is remaining overweight the FTSE 250. The index has suffered as investors have taken profits from their winners, he says.
Port says the UK mortgage market is unlikely to take a hit from the recently introduced mortgage market review and the consumer recovery will therefore broaden out beyond London and the South East.
For this reason he likes the domestic focus of the FTSE 250.
