In perhaps one of the more predictable sell-offs in recent years, the UK mid cap market has had a soft-period of performance after five years of stellar gains – particularly since 2012.
A number of managers had previously warned about valuations in the sector and sold down their positions before their predictions were proved correct, including JOHCM UK Equity Income manager Clive Beagles and Standard Life UK Equity Income Unconstrained’s Thomas Moore.
According to FE data, the FTSE 250 is down 1.73 per cent so far in 2014. While this is hardly a disaster, it is a far cry from the returns of 32.27 per cent in 2013. The index is down almost 7 per cent since the end of March, with volatility at its highest for some time.
Performance of indices in 2014
Source: FE Analytics
Fund managers are often bought for their ability to weather market turbulence and protect investors better than a tracker would; however, our data shows that 11 of the 12 actively managed UK mid cap funds have underperformed this year.
The worst performer – Allianz UK Mid Cap – has lost 6.86 per cent, and more than 11 per cent since February. Among manager Andrew Neville’s biggest positions are Howden Joinery and Spectris, which have lost around 10 per cent so far this year.
Old Mutual UK Mid Cap, managed by Richard Watts, has lost the most since its peak, at 12.74 per cent. The £1.4bn portfolio is the second largest of all the UK mid cap funds, behind Schroder UK Mid 250.
Performance of funds vs index in 2014
Source: FE Analytics
The two mid cap trackers – BlackRock Mid Cap UK Equity Tracker and HSBC FTSE 250 Index – have performed roughly in line with their benchmark, as is to be expected, though the HSBC vehicle has actually returned slightly more.
The big exception to the rule has been FE Alpha Manager Mark Martin’s Neptune UK Mid Cap fund, which is the only actively managed mid cap fund to post positive returns this year. It hasn’t been in the red at any point so far in 2014, and has been the least volatile of all of its direct rivals.
Martin (pictured) has made it his priority to protect against the downside better than his peers and so investors are likely to be very pleased with the way the £231m fund has performed. Commenting on Neptune UK Mid Cap, FE Research said: “By keeping at least 20 per cent of the fund in recovery, structural growth and self-help stocks, manager Mark Martin aims to ensure he can perform regardless of economic conditions.”
Twenty per cent of the fund is in healthcare – traditionally a defensive sector that performs well in times of stress.
Neptune UK Mid Cap is a top-decile performer in its IMA UK All Companies sector since launch, with returns of 250.14 per cent. It is also well ahead of its FTSE 250 benchmark, with significantly less volatility.
Performance of fund, sector and index since launch
Source: FE Analytics
A number of high-profile earnings- and analyst-downgrades have led the sell-off in mid caps – a threat that FE Trustnet warned about back in January of this year. Supergroup and Ted Baker were discounted by broker Oriel in January and are both down more than 20 per cent year-to-date.
While you could be mistaken for thinking funds in IMA UK Smaller Companies only invest in small and micro caps, this has been far from the case in recent years, with managers in this sector looking to tap into the stellar performance of the FTSE 250.
Small cap funds tend to take the Numis Smaller Companies index as their benchmark, which contains around half of the constituents of the mid cap index.
Among those that have performed the worst so far this year are those with a big bulk of their assets in mid caps. Harry Nimmo’s Standard Life UK Smaller Companies portfolio, which includes FTSE 250 companies Rightmove, Supergroup, Paypoint and Ted Baker in its top-10, has lost 10.54 per cent so far.
The manager recently explained why he has sold completely out of FTSE AIM-listed stock ASOS, which is itself big enough to sit in the FTSE 250 index.
Performance of fund vs sector and index in 2014
Source: FE Analytics
While mid caps have had something of a wake-up call, a number of managers believe that the widespread falls have created significant opportunities for stockpickers.
FE Alpha Managers Mark Slater and Mark Barnett believe plenty of value remains, and in an upcoming article Jupiter’s Steve Davies will explain why investors should be buying into domestic cyclical names in the index.
