Pringle, who co-manages the Kames UK Equity Absolute Return fund with David Griffiths, played the UK domestic growth theme via mid-caps last year, but began to exit the trade a few months ago as the FTSE 250 started to fall.
He warns that investors shouldn’t be trying to buy mid-caps now as he is concerned that the UK market, as a whole, will come under increasing pressure due to its lofty valuation.
“My concern from a risk management point of view is that the rotation we have seen out of the FTSE 250 has happened when the FTSE 100 has hardly moved,” Pringle explained.
“I think it is more likely that this is a prelude to a proper correction in the market than the FTSE 250 quickly recovering between now and the end of the year.”
“From an aggregate level and a risk management level, we are moving to hedge ourselves against the wider market coming under pressure.”
Investors in the UK equity market have been very well-rewarded over recent years. However, those who have had a clear bias to the FTSE 250, which is more domestically orientated than the FTSE 100, have seen stellar returns.
According to FE Analytics, the mid-cap index returned 32.27 per cent in 2013, beating the FTSE 100 by close to 14 percentage points.
Performance of indices in 2014
Source: FE Analytics
However, that return profile looks very different in 2014. Due to that period of very strong performance and as investors have wanted to rotate into more defensive assets, the FTSE 250 has lost 2.44 per cent in so far in 2014 – having lost 7 per cent over the last three months.
The FTSE 100, on the other hand, has delivered a more robust 2.44 per cent year to date.
Performance of indices in 2013
Source: FE Analytics
Pringle says it is no real surprise that mid-caps have fallen this year, but says the speed in which investors have rotated their portfolios is quite concerning.
“The rotation we have seen in the market is the sharpest rotation since the dash for trash in 2009 after the financial crash,” the manager said.
“It is also the largest outperformance from the FTSE 100 versus the FTSE250 since the mid-1990s in the absence of a recession. It’s been quite remarkable.”
“We had already started to move before this rotation took place and we had all but closed our UK domestic theme by the end of February.”
A number of fund managers, such as FE Alpha Manager David Coombs, had been adding to their mid-cap exposure during the period of initial market weakness.
However, Pringle warns investors that they shouldn’t expect mid-cap funds to bounce back quickly as he is concerned that there is more pain to come.
“David and I would take a more cautious view,” Pringle said. “I suspect that there are a lot of people in the market who are more hoping that a reversion will happen.”
“To be fair, a lot of that is driven by the fact that liquidity in the market isn’t allowing people to get out of positions that they might want to get out of.”
“We have a bit more of a defensive view. We had already moved into large-caps and we will probably do a bit more of that over the next couple of weeks.”
Pringle and Griffiths launched their four crown rated Kames UK Equity UK Absolute Return fund in February 2010.
According to FE Analytics, the £251m fund has delivered a positive return in each calendar year since its launch – including the period between February 2010 and January 2011. However, the fund is down more than 1 per cent year to date.
Over the rolling period since its inception, Kames UK Equity Absolute Return has returned 11.63 per cent.
As a point of comparison, while it has returned considerably less than the FTSE All Share over that time, it has been more than six times less volatile.
Performance of fund versus indices since Feb 2010
Source: FE Analytics
The managers aim to deliver around a cash plus 4 per cent return over rolling 12 months period, but also want that return to be considerably less volatile than government bonds.
Pringle says he and Griffiths try to be as market neutral as they can possibly be. They take long/short positions in the UK equity market via contract for differences (CFDs), which are a form of derivative that allows investors to bet on the direction of an asset price without physically owning the underlying security, in this case equity.
Pringle and Griffiths have three investment strategies: themes, best ideas and pair trades.
The themes are all top-down macro driven and they will run a number of uncorrelated themes at any one time.
The best ideas come out of some of the favoured stocks from Kames’ wider UK equity team and their pair trades are used to exploit dislocations between similar types of stocks.
The Kames UK Equity Absolute Return fund’s clean share class has an ongoing charges figure (OCF) of 0.87 per cent.
