While none made it into the top-10, the 10-20 bracket is packed full of passives, including Royal London UK All Share Tracker and HSBC FTSE 100 index.
The list of 20 also included two enhanced passive funds – Invesco Perpetual UK Enhanced Index and SWIP UK Enhanced Equity. In total, the IMA UK All Companies sector has 278 constituents.
Source: FE Analytics
Aside from trackers, large cap UK equity funds with a particular focus on mega caps dominate the list of the best-performing funds.
Neil Woodford’s SJP UK High Income portfolio tops the list, with Franklin UK Blue Chip, Invesco Perpetual UK Strategic Income, Invesco Perpetual Income and JOHCM UK Opps not far behind.
There is an exception, however.
George Godber’s CF Miton UK Value Opportunities fund has an overweight in mid-caps, but strong stock selection has held it in good stead.
Small and mid-caps led the rally in 2012 and 2013, with the FTSE 250 more than doubling the returns of the FTSE 100 over the 24 month period.
Smaller companies tend to have a much higher exposure to the UK domestic sector, which has been buoyed by improving economic data and sentiment.
The degree of outperformance made it much easier for active managers to outperform their FTSE All Share benchmark, which is dominated by the top-20 largest companies in the UK.
This trend has reversed this year however, with the high proportion of mid-cap heavy funds falling with the FTSE 250.
Jamie Hooper, manager of the £241m AXA Framlington UK Growth fund, thinks the trend of mega cap outperformance is set to continue for the rest of 2014.
He has upped his exposure to mega caps in recent months to take advantage of the shift, but expects mid-caps to return to their winning ways before long.
“The biggest move I’ve made over the past nine to 10 months has been in reducing domestic stocks,” he said.
“If you look at the 12 to 18 months prior to this, domestic stocks – particularly in the mid-cap area – performed very well, but I felt that a number were overly bought.”
“On the other side, I’ve been actively increasingly my larger cap exposure. I spend the majority of my time avoiding the “mega traps”, which are larger and more inert. They tend to underperform, but there are certain times in the interest rate cycle that they perform better.”
“When there is an inflexion in interest rates, as there is now, they can perform better.”
Hooper says that mega caps outperform the wider market on average once every six or seven years, and that 2014 is likely to be one of those years.
Investors in UK passive funds will no doubt welcome the news, though the range of returns of FTSE trackers has been more significant than many might expect – even over a period as short as six months.
Firstly, the decision to go with either a FTSE 100 or FTSE All Share tracker has influenced your return over the period.
While the All Share is still dominated by the 20 largest companies in the UK, big movements in small and mid-caps at the bottom end of the index can still have a significant impact.
FE data shows that the FTSE All Share has returned 0.9 per cent over the past six months, whilst the FTSE 100 has returned 1.52 per cent.
If, like a number of UK managers, you think that mega caps are set for a period of outperformance, a FTSE 100 tracker is perhaps the better option.
More interesting, however, is the difference in performance between passives that track the same index.
The best performing FTSE tracker over the six month period – Royal London UK All Share tracker – has returned 2.14 per cent over the period, while the worst – Aviva UK Index Tracking – is almost 2 percentage points behind.
Both funds track the FTSE All Share index.
Performance of funds and index over 6months
Source: FE Analytics
While usually outperformance is seen as a big positive by investors, head of FE Research Rob Gleeson says that when it comes to passives, replication is the be-all and end-all.
“If a tracker fund outperforms, it means there is a greater chance of it underperforming at some point,” he said.
Interestingly, the vast majority of UK trackers have beaten their respectively benchmarks over the past six months. FE data shows that 13 of the 20 funds that take the All Share as their benchmark have returned more than 0.9 per cent over the period.
Gleeson says that a technical factor may explain this unusual trend.
“Trackers tend to be better at replicating the larger stocks,” he said. “An All Share tracker typically has better replication of the FTSE 100 than the tail, and since this is the area of the market that has performed better, it could be the funds have outperformed for that reason.”
Among the few trackers that have returned less than the All Share are the Vanguard FTSE UK Equity Index and Vanguard FTSE U.K. All Share Index funds.
Both are fractionally behind with returns of 0.82 per cent, and have consistently the lowest tracking errors of any trackers in the sector.
Two percentage points may sound like very little, but over the longer-term this margin of underperformance over a six month period can be huge.
Indeed, the difference between the best performing FTSE tracker over 10 years – M&G Index Tracker – and the worst performing tracker – Halifax UK FTSE 100 Index Tracking – is more than 46 percentage points.
Performance of funds over 10yrs
Source: FE Analytics
Gleeson says that Vanguard is among the few asset managers that use full replication, and is also able to keep costs to a minimum.
“Full replication is more expensive. Historically there has been a balancing act between keeping costs down and keeping replication close,” he said.
“Matching the weightings of the companies is of course important to matching the return, but so is cost.”
“Now Vanguard has come along and there is full replication. There is no stock-lending, and because of the scale costs are also kept low.”
Vanguard FTSE UK Equity Index has ongoing charges of just 0.15 per cent.
Back to Hooper, the AXA Framlington manager says that a number of the mega cap stocks he’s bought for his fund such as Rio Tinto and BHP Billiton are “self-help stories.”
“They are cheap and changing,” he said.“They have made bad decisions and have depressed earnings, but now they are listening to shareholders.”
Hooper retains some exposure to mid-caps on a stock specific basis, including the likes of Rightmove and Booker.
He says he is keeping a watchful eye on further falls in mid-cap companies.
AXA Framlington UK Growth has outperformed its IMA UK All Companies sector average over six months, but is still down 0.31 per cent over the period.
Top-10 positions include Shell, BP, AstraZeneca and Rio Tinto.
The fund has been extremely consistent since Hooper took it over in late 2006, outperforming versus its IMA UK All Companies sector average every year with the exception of 2012.
FE data shows that the fund has returned 61.07 per cent over the period, compared to per cent from the 47.09 per cent from the sector and 48.94 per cent from the All Share.
