Margetts’ Toby Ricketts has sold his holding in FE Alpha Manager Paul Spencer’s Franklin UK Mid Cap fund because of concerns about over-valuation in the FTSE 250 and has moved his capital into the Rathbone Income fund instead.
Ricketts, who heads up various funds of funds at Margetts, warned investors in 2013 that bubbles in the UK’s mid and small-cap space would start to unwind this year.
There are already signs this has started to happen as, according to FE Analytics, the FTSE 250 index has fallen considerably over recent months.
Performance of index in 2014
Source: FE Analytics
The manager says that the outlook for mid-caps will continue to be volatile as it was a part of the market that had become overhyped. He has, therefore, switched his UK exposure around.
“We have been rotating the portfolio a bit because we fell that parts of the market, small and mid-caps in particular, were becoming frothy,” Ricketts (pictured) explained.
“For instance, we have sold out of the Franklin UK Mid Cap fund because we think it could be potentially vulnerable to a fall in the market.”
“It’s not that we think that cyclicals or mid and small-caps are bad companies, but we feel they have run way ahead of what we think is a reasonable valuation.”
FE Alpha Manager Paul Spencer has managed the £1.1bn Franklin UK Mid Cap fund since February 2006.
According to FE Analytics, it has been the third best performing fund in the IMA UK All Companies sector over that time with returns of 198.58 per cent and, more importantly, it has beaten its FTSE 250 ex IT benchmark by close to 70 percentage points in the process.
Performance of fund versus sector and index since February 2006
Source: FE Analytics
Spencer’s fund also took full advantage during last year’s rally, as it returned 37.98 per cent in 2013 while its benchmark returned 34.94 per cent.
However, experts agree that there has been a trend among investors to switch out of high multiple growth stocks into more defensive areas of the market.
Franklin UK Mid Cap has been hit by this rotation and has been a bottom quartile performer so far this year due to its losses of 0.71 per cent.
Those losses have mainly come over the last couple of months, with the fund falling 7 per cent since the first week of March.
Ricketts’ decision to sell-out of the fund is completely opposite to that of FE Alpha Manager David Coombs who told FE Trustnet that he was using this period of weakness to add to his UK mid-cap exposure.
However, while Ricketts still rates Spencer and his team’s ability, he says he wants to be invested in larger, more defensive, companies.
“It’s not really an asset allocation change, but more of a change in style,” Ricketts said.
“We want to move away from mid and small-caps because we can’t see the 20 to 30 per cent returns of last year being repeated; in fact we wouldn’t want that to happen. “
“You want to be in areas that are supported by good earnings growth and you could see a high single digit return from UK equities, if you get it right.”
“Therefore we have been moving out of our higher risk funds in the UK and US and one of the funds we have bought is Rathbone Income.”
“Carl Stick, who manages the fund, does have some mid-cap exposure but he mainly focuses on companies that are generating good earnings and also has a lot in larger companies.”
Stick is one of the longest-serving UK managers, having taken over his five crown rated Rathbone Income fund in January 2000.
As Ricketts points out, Stick’s £795m fund has a high weighting to blue-chip mega caps. Our data shows, for instance, that he counts the likes of GlaxoSmithKline, British American Tobacco, HSBC and Unilever as top 10 holdings.
He currently holds less than 30 per cent in the FTSE 250 and FTSE Small Cap indices, and also holds close to 10 per cent of his fund in cash and cash equivalents.
Our data shows that Rathbone Income has been the second best performing fund in the IMA UK Equity Income sector since Stick took over in January 2000 with returns of 243.05 per cent and has beaten its benchmark – the FTSE All Share – by more than 160 percentage points.
Performance of fund vs sector and index since Jan 2000
Source: FE Analytics
While Stick was one of many high-profile managers to be hit hard by the financial crisis, his fund has only underperformed against the sector in three out of the last 10 discrete calendar years; which were 2007, 2008 and 2013.
The fund also boasts top-quartile returns so far in 2014.
Stick is renowned for his focus on generating a growing dividend. For instance, investors who bought £10,000 worth of units in Rathbone Income 10 years ago would have earned £5,382.86 worth of income.
It currently yields 3.58 per cent and its clean share class has an ongoing charges figure (OCF) of 0.8 per cent.
Ricketts has managed funds of funds since 1995 and currently heads up Margetts International Strategy, Margetts Providence Strategy, Margetts Venture Strategy, Margetts Select Strategy.
Our data shows that he has returned 120.26 per cent to his investors over the 10 years, while his peer group composite has returned 90.76 per cent.
However, due to Ricketts’ recent high weighting to emerging market funds, he has underperformed against his peers over rolling one and three year periods.
Toby Ricketts: Why I’ve sold Franklin UK Mid Cap
14 May 2014
The Margetts manager says mid and small caps have run well ahead of what he thinks are reasonable valuations.
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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.