However, due to factors such as compliance issues and the fear of being lambasted for taking a big bet on an underperforming stock when the index is rallying, a lot of managers will keep their portfolios relatively in line with their benchmarks.
The point being that they aren’t going to be criticised if they fall with the market, but they will come under pressure if they are struggling when the index is ripping forwards.
That’s why some investors will use a tracker as they can get the index’s return, but at a lower cost.
However, FE Trustnet research shows there are a number of UK managers that have managed to consistently outperform by making big off-benchmark calls in their portfolios.
Each of the five funds mentioned have been top decile performers over a full market cycle, but have done so with low beta, very high tracking error and without a high weighting to smaller companies.
Liontrust Special Situations
The five crown-rated Liontrust Special Situations fund, which is headed up by the FE Alpha Manager duo of Anthony Cross and Julian Fosh, has been the sixth best performing fund in the highly-competitive IMA UK All Companies sector over seven years.
According to FE Analytics, it has returned 118.86 per cent over that time, more than doubling the return of its FTSE All Share benchmark in the process.
Performance of fund vs sector and index over 7yrs
Source: FE Analytics
The £1.2bn fund has achieved those returns with the forth lowest beta and seventeenth highest tracking error over the period.
Its returns have been consistent, as Cross and Fosh’s fund was a top quartile performer in each calendar year between 2008 and 2012.
Though the fund’s quality bias meant it underperformed in 2013, it is once again top quartile in 2014.
The two managers follow the economic advantage model and look for companies that have intangible strengths that competitors struggle to reproduce.
Liontrust Special Situations is a predominantly a FTSE 350 fund and its ongoing charges figure (OCF) is 0.88 per cent.
CF Lindsell Train UK Equity
The five crown-rated CF Lindsell Train UK Equity fund was recently added to the FE Select 100.
Its FE Alpha Manager Nick Train has proven he has the ability to consistently beat the market with an unconstrained and highly-concentrated portfolio.
Our data shows the £1bn fund has been a top decile performer in the IMA UK All Companies sector since its launch in July 2010 with returns of 150.49 per cent, beating the FTSE All Share by 87.61 percentage points.
It has been bottom decile for beta and tracking error over that time.
Like the Liontrust fund, Train’s portfolio has been very consistent. Apart from 2007, the fund has beaten the index in every calendar year since its launch, turning in top quartile returns in 2008, 2009, 2010, 2011, 2012 and 2013.
Train takes a long-term approach and backs the companies he likes in a big way.
His top holdings accounts for 70 per cent of his portfolio and his off-benchmark bets include Unilever, which makes up 9.34 per cent of the fund, Heineken which makes up 7.3 per cent and London Stock Exchange which makes up 6.8 per cent.
He also holds AG Barr and Celtic Football Club lower down the fund.
Its OCF is 0.77 per cent and it yields 2.39 per cent.
Schroder Recovery
Schroder Recovery has a very different approach than the Liontrust and CF Lindsell Train funds as its managers, Kevin Murphy and Nick Kirrage, are “deep value” investors who will only tend to invest in bombed out stocks.
Though it means returns have been more volatile than most, the managers have considerably outperformed while largely ignoring the weightings of their FTSE All Share benchmark.
The £606m fund has been a top decile performer since Kirrage and Murphy took charge of the portfolio in July 2006 and over one, three, five and seven year periods.
It has also comfortably beaten its benchmark over all of those time frames.
Performance of fund vs sector and index since July 2006
Source: FE Analytics
It has also only underperformed the index in two calendar years over those times; which were the turbulent markets of 2007 and 2011.
Schroder Recovery has had a tracking error of 11.22 per cent since its two managers took over and has been top decile for its alpha generation, relative to its benchmark.
The fund’s largest individual stock is AstraZeneca, which accounts for 7.4 per cent of its assets. Other top 10 holdings include Royal Bank of Scotland, Barclays and Morrisons.
Its OCF is 0.91 per cent.
Invesco Perpetual UK Strategic Income
FE Alpha Manager Mark Barnett has been in the news recently after being given the unenviable task of succeeding Neil Woodford as manager of the multi-billion Invesco Perpetual High Income and Income funds.
However, investors in those two funds will no doubt be pleased to see that Barnett has a strong stock-picking track record as manager of his five crown-rated Invesco Perpetual UK Strategic Income fund.
According to FE Analytics, the fund – which used to be in the IMA UK Equity Income sector but recently shifted across to the IMA UK All Companies sector – has returned 115.96 per cent since Barnett took over in January 2006, compared to the All Share’s returns of 74.43 per cent.
Barnett has delivered those returns with a beta of 0.6, which is far lower than the sector average, and a tracking error of 11.16 per cent, which is considerably higher than the sector.
Though the fund has higher weighting to mid-caps than Barnett’s other larger portfolios, he counts the likes of British American Tobacco, GlaxoSmithKline and BT Group as top 10 holdings in his UK Strategic Income fund.
It yields 3.37 per cent and has an OCF of 0.92 per cent.
Trojan Income
Most of the funds in the IMA UK Equity Income sector that have considerably outperformed with low beta and high tracking error over a seven-year period are portfolios which invest in smaller companies, such as Unicorn UK Income and PFS Chelverton UK Equity Income.
However, one predominantly large-cap fund which has delivered superior returns while generating a high level of alpha is FE Alpha Manager Francis Brooke’s £1.6bn Trojan Income fund.
According to FE Analytics, it has been the sector’s sixth best performing portfolio over that time with returns of 77.72 per cent and has beaten the FTSE All Share by close to 30 percentage points.
Performance of fund vs sector and index over 7yrs
Source: FE Analytics
The five crown-rated fund has also had the second lowest beta and third highest tracking error in the sector over that time.
Brooke’s relatively defensive approach means the portfolio has lagged the sector in rising markets such as in 2009, 2012 and 2013 but he has a proven ability of protecting capital, returning 6 per cent in the falling market of 2011 and only losing 12 per cent in 2008 when the index fell 30 per cent.
The fund is relatively concentrated as it is made up of just 45 holdings and its largest 10 positions account for 35 per cent of the total portfolio.
Brooke’s three largest holdings are Royal Dutch Shell, Unilever and BP.
It has a yield of 3.79 per cent and has an OCF of 1.03 per cent.
