FE Alpha Manager Dean’s five-crown rated Schroder [formerly Cazenove] UK Opportunities fund has become increasingly popular with both advisers and private investors over recent years due to its strong and consistent track record. It has seen £640m worth of inflows in the last year alone. Though the fund regularly topped the highly competitive IMA UK All Companies sector on a discrete and cumulative basis as a much smaller portfolio, the fund has fallen into the bottom quartile over a 12 month period.
However, Dean (pictured) insists that the fund’s recent underperformance has nothing to do with its £2.5bn worth of assets.
“What I would say is that short periods of underperformance aren’t unusual and we have been here before during my time managing the fund and I’m sure there will be more periods of weakness in the future,” Dean explained.
“If you look at our turnover rate on an annualised basis, where we have been over the months of February, March and April is consistent with the levels we had in 2010 and 2011. Looking at the turnover, the levels are fine and we can continue do what we want within the portfolio; like we have done in the past,” she said.
Though she understands why investors may have come to the conclusion that size has hindered her ability to manage the fund on a daily basis, Dean is quick to point out that there have been other forces at work.
“I would certainly say there have been some stock specific disappointments,” Dean said.
“For example, we owned both Just Retirement and Partnership Group, which both had painful experiences when the chancellor made his changes to the pension system in the budget. When something like that happens, there isn’t much you can do.”
“Another thing that hurt us at the back end of last year was companies issuing profit warnings. One example was a company called Perform. That was costly, but in that case we added to our holding and so far this year, the company is back on track.”
Life insurance companies and annuity providers were some of the worst hit companies following the chancellor’s budget. As the graph below shows, both the stocks fell drastically earlier this year and Perform Group, the FTSE 250 listed digital sports company, also fell more than 50 per cent after its profit warning in December.
Performance of stocks over 1yr
Source: FE Analytics
Though those stock specific issues have hurt the fund’s performance, Dean says the major reason why her fund has failed to beat the sector and index is because of her portfolio positioning.
Having vastly outperformed the FTSE 100 in 2013, the FTSE 250 has fallen in 2014 as investors have rotated out of high multiple growth stocks, such as domestic facing mid-caps, into larger more defensive companies and Dean admits that her mistake was not moving into large-caps earlier.
However, she says her fund is now well-positioned for the next stage of the cycle.
“While there were a few stock specific issues, the biggest story – which we have realised with the benefit of hindsight – is that we should have used more of our cash flows to tilt the portfolio more towards mega-caps,” Dean said.
“We ran a far more balanced portfolio and while we had started to implement that directional change candidly at the back end of last year; our error was that we didn’t move more quickly.”
“The good news is that, right now, we are comfortably back into the second quartile in the month of May.”
“The actions we have taken have started to have an impact and having had a tough period, I’m pretty confident that we can continue to stick to what we do and identify turning points in the business cycle.”
Dean understands that some more cynical investors may think that it is very convenient that she is investing in mega-caps, which are far more liquid than smaller parts of the market, as her fund is now a much larger size.
However, she says that when mid-cap are once again a screaming buy, she would have no problem rotating the portfolio accordingly.
“Our process has remained unchanged. What we also seek to do is to anticipate changes in the business cycle and because we are usually early, it normally gives us a price advantage,” Dean explained.
According to FE Analytics, Schroder UK Opps has been a top decile performer since Dean took over in December 2002 with returns of 327.16 per cent, beating its benchmark – the FTSE All Share – by close to 140 percentage points in the process.
Performance of fund vs sector and index since Dec 2002
Source: FE Analytics
Our data shows that though the fund underperformed in the years building up to the financial crisis, its returns have been consistent recently, beating both the sector and its benchmark in each discrete calendar year between 2008 and 2013.
While the fund was a top quartile performer last year, over a rolling 12 month period Schroder UK Opps has dropped into the bottom quartile and has failed to beat the FTSE All Share.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Cazenove had made plans to soft-close Dean’s fund prior to the Schroders acquisition last year and those plans were scrapped after the deal.
Nevertheless, Schroders has since stopped marketing the fund to “stem inflows”.
Rob Morgan (pictured), pensions and investment analyst at Charles Stanley Direct, has warned investors in the past that managers like Dean, who have a high turnover rate, are the ones that are the most likely to be hindered by heavy inflows.
However, at this point in time, he agrees that Dean’s underperformance has had little to do with her large AUM.
“I think she is a very good manager, though she does have this high turnover style and will rotate the portfolio quite a lot, which can add to its costs,” Morgan said.
“In terms of its size, it’s really difficult to gauge. A lot of the mid-caps she holds are pretty liquid and she tends to invest in the larger mid-caps and FTSE 100 stocks. I think time will tell, but at the moment in the current market environment, I’m pretty relaxed.”
“There will probably come a time when Schroders will have to do something more drastic than slowing inflows.
He added: “It is certainly one to watch out for, but I’m OK with it at the moment.”
Schroder UK Opps’ clean share class has an ongoing charges figure (OCF) of 1.19 per cent.
