Hughes, a fund manager at Apollo Multi Asset Management, says looking at the way funds work together is a key part of their fund management process.
“It’s something we think about a lot, have you got the right combination in your portfolio,” he said.
“You need to make sure you’re an investor, not a collector.”
Hughes says investors need to think about why each fund is in their portfolio and if it’s still doing what it set out to do, otherwise investors are at risk of having a collection of funds that don’t work toward their ultimate savings goal in the right way.
“The overall portfolio needs to work well together,” he added.
In the UK, Hughes says two portfolios that stand out as the ideal duo to take advantage of both rising and falling markets are the AXA Framlington UK Select Opportunities fund and the Investec UK Special Situations portfolio.
“That combination would work quite well. You get broad market exposure and if you bolted the two funds together, as a portfolio of two they would smooth out the peaks and troughs,” he said.
Hughes says FE Alpha Manager Nigel Thomas’s AXA Framlington UK Select Opportunities fund is a “sensible holding”, investing across the market cap spectrum.
“It’s a good growth, all-cap strategy,” he said.
“In an environment like last year where you’ve got a rally in mid and small caps, you’d get Nigel Thomas performing very well.”
Hughes says Alastair Mundy’s contrarian, value-based style of management would cause the Investec UK Special Situations fund to lag in that kind of environment, but the four FE Crown rated portfolio would likely beat its peers in down markets.
“In a more defensive environment, where you need large cap exposure, Alastair Mundy’s kind of strategy would outperform,” he said.
Hughes says both funds can be volatile so investors should expect periods of underperformance from each; however, the beauty of the combination is that while one fund is out of favour, the other should be beating the market, helping to smooth investor returns overall.
Indeed Thomas’ AXA Framlington UK Select Opportunities fund has delivered solid returns for investors over the long term.
Over the last decade, the fund made 192.38 per cent, more than 50 percentage points ahead of the FTSE All Share and the IMA UK All Companies sector.
Performance of fund, sector and index over 10 years
Source: FE Analytics
The fund has continued to beat the market over the shorter term, but is second quartile in the sector over one and three years.
The manager has consistently its peers in each calendar year over the last decade, apart from 2012, though the fund fell nearly as far as the market in 2008.
As Hughes highlighted, Thomas invests across the market cap spectrum and is not afraid to look at small to medium sized companies for growth opportunities.
Among his top holdings are FTSE 250 plastic and fibre products supplier Essentra and more staple names like GlaxoSmithKline, Royal Dutch Shell and HSBC.
Mundy (pictured), on the other hand, focuses on large-cap, value opportunities, looking for stocks that are unloved and underpriced by the market.
The manager recently bought back into battered supermarkets Tesco and Morrisons because he thought the market had placed them on too great a discount.The manager also holds Royal Dutch Shell, HSBC and GlaxoSmithKline in his top 10, but he’s also backing out of favour bank RBS.
Mundy also holds a couple of firms further down the market cap like FTSE 250 aerospace and security company QinetiQ and builders merchants firm Grafton Group.
Over the last decade, Mundy’s portfolio has gained 161.78 per cent, outperforming both the IMA UK All Companies sector and the FTSE All Share.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
The fund has also slightly outperformed the market and its peers over three years, though it has lagged both measures over one and five years, according to FE Analytics.
True to form, Mundy’s Investec UK Special Situations fund outperformed its peers and the index in the financial crisis of 2008 and again in the down markets of 2011.
In the former, the fund lost 19.58 per cent, not a small amount, but investors in the average UK All Companies fund would have lost over 10 percentage points more – down 31.96 per cent.
The same was true in 2011 when the sector slipped 7.04 per cent. Mundy’s fund was down just 2.38 per cent that year.
When markets roared ahead in 2012 and 2013, the Investec portfolio rose in line with its peers and slightly ahead of the market in both calendar years.
The AXA Framlington UK Select Opportunities fund has ongoing charges of 0.83 per cent while Investec Special Situations has and ongoing charges figure (OCF) of 0.84 per cent.
In the first article in the series, Charles Stanley’s Rob Morgan tipped a duo of funds to play both sides of the European recovery.
