In both these years the average fund in the IMA UK All Companies sector failed to beat the FTSE 250 but stayed more than 10 percentage points ahead of the FTSE 100.
Funds with a bias to mid and small caps were more likely to outperform in 2012 and 2013 with skill and luck harder to differentiate.
In 2014 the trend has started to reverse with many analysts and managers calling a rotation out of smaller cap stocks into larger stocks.
The FTSE 100 is down 0.01 per cent since the beginning of the year whereas the FTSE 250 is down 2.85 per cent.
Performance of indices in 2014
Source: FE Analytics
However, for investors looking for large cap exposure, a manager’s willingness to do something different from the index is key to outperformance.
Here we look at three funds in the IMA UK All Companies sector whose respective managers have managed to beat the index and sector while holding mostly large or mega cap stocks over the past few years.
AXA Framlington UK Select Opportunities
Many UK equity funds are charged with being “closet trackers”, but this £4.6bn fund is certainly not one of them.
A glance at Nigel Thomas’ top-10 shows that he has the conviction and flexibility to invest in companies at the bottom end of the FTSE 100, and has no problem in ignoring lower growth mega-caps which make up the bulk of the index.
Source: FE Analytics
Among Thomas’ biggest positions at present are ITV, Shire and Weir Group.
Thomas has traditionally held a big portion of his fund in small and mid-caps, but the size of the fund has seen him take on more of a large-cap focus in recent years. He currently has just one FTSE 250 company in his top-10. Plastics supplier Essentra has gained over 620 per cent over the past five years.
In spite of mass inflows, the AXA fund has continued to outperform on a consistent basis, beating his peer group composite in every full calendar year except 2004 and 2006 since taking over the fund in 2002.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The five crown-rated fund has returned 49.66 per cent over three years compared with a sector average of 46.09 per cent and a gain in the FTSE All Share of 43.24 per cent.
CF Lindsell Train UK Equity
The £1bn CF Lindsell Train UK Equity fund, managed by FE Alpha Manager Nick Train, is the seventh best performer in the sector over the past five years and top quartile over three years although its position falls to 33rd best.
Train’s outperformance over the longer term has led him to be regarded as a top stock picker.
He focuses more on longer-terms trends, arguing that current concerns over the end of quantitative easing and rising interest rates are overly short-sighted.
Over the past three years the fund has returned 66.12 per cent compared with a sector average of 46.09 per cent and a gain in the FTSE All Share of 43.24 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
However, performance has tailed off in recent months with the fund down 6.06 per cent since June.
Among more well-known large cap names such as Unilever and Diageo, the manager has some other high conviction holdings in his top ten including Schroders, Heineken and Sage Group.
Old Mutual UK Alpha
The £1.4bn Old Mutual UK Alpha fund has been managed by Richard Buxton since December 2009.
Buxton invests in a high-conviction portfolio of 35 stocks – predominantly large caps – which he believes are unfairly cheap.
Part of his ability to differentiate from his peer group is timing of the market and liking for contrarian stock or sector bets.
He recently told FE Trustnet he was betting on a recovery in UK banks and continued strong gains for house builders, buying up heavy positions in these areas accordingly.
Canaccord Genuity’s Justin Oliver recently called Buxton, alongside Threadneedle’s Simon Brazier, as one of the UK’s best stock pickers due to his ability to outperform with a bias to large caps.
Over the past three years the fund has returned 61.47 per cent compared with a sector average of 46.09 per cent and a gain in the FTSE All Share of 43.24 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Buxton also has Glencore, Shire and St James’s Place in his top 10 although his sectoral bet on banks such as HSBC, Lloyds and Barclays is his most current contrarian play.
The UK banking sector was recently downgraded by ratings agency Moody’s due to its exposure to multimillion pound fines or lawsuits and their likelihood to hurt profits.
Buxton beat his peer group composite for performance in years where markets tended to be rising such as 2013 and 2012 but also lost more in downmarket years such as 2011 and 2008.
