Threadneedle UK equities head Simon Brazier (pictured) and Blake Hutchins, co-manager on the Threadneedle UK fund, have joined Investec alongside Threadneedle analysts Ben Needham and Anna Farmbrough and product specialist Neil Finlay, taking up their posts in November. Brazier ran a high alpha strategy at Threadneedle that invested predominantly in large caps after he took over the £2bn Threadneedle UK fund in May 2010.
Over this period the fund has returned 63.28 per cent compared to an average return in the IMA UK All Companies sector of 52.91 per cent, while the FTSE All Share gained 49.12 per cent.
Performance of fund, sector and index since May 2010
Source: FE Analytics
The move has prompted Square Mile to suspend its rating on the Threadneedle UK fund, with senior investment research analyst John Monaghan saying the move of Brazier and his team puts the fund’s future potential in question.
“We rate Brazier and his team highly and initially awarded his UK fund an A-rating. The bulk of the portfolio is typically invested in well run blue chip UK companies that have strong franchises, barriers that deter potential competitors and high cash flows,” he said.
“These positions are augmented by more cyclical holdings which tend to gyrate in and out of fashion depending on the macroeconomic situation.”
“While there is a sound process in place, we think that Brazier’s stock picking abilities and experience has been key to the performance, and have suspended the rating as a result.”
“Incoming manager Chris Kinder has amassed a strong track record on the £46m Threadneedle UK Extended Alpha fund since December 2010, but this fund has a different process and is far smaller.”
“We will need to meet with Mr Kinder and familiarise ourselves with his approach before removing the suspended rating.”
With this in mind, here are three alternatives which all generate the majority of their alpha by investing in large caps.
Old Mutual UK Alpha
This £1.5bn fund has been managed by Richard Buxton since December 2009. The manager is no stranger to a high profile departure himself, having moved over from Schroder in 2013.
Over Buxton’s time on the fund it has returned 84.51 per cent compared to a sector average of 66.48 and a gain in the FTSE All Share of 59.56 per cent.
Performance of fund, sector and index since Dec 2009
Source: FE Analytics
The manager makes a strong comparison with Brazier, not least because of the two’s propensity to favour, and proven ability make money from, large and mega caps despite the mid and small cap rally over the past few years.
In fact, Canaccord Genuity’s Justin Oliver recently named the pair as the UK’s best stock pickers owing to their ability to outperform without simply buying mid and small caps during a rally.
Buxton has a high-conviction portfolio of just 35 stocks – predominantly large caps – in the fund, many of which are unloved or in an out-of-favour sector.
This contrarian style and ability to differentiate from his peer group means his strategy involves attempting to time the market, which few managers will admit to pursuing.
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 two areas despite apparent headwinds.
JOHCM UK Opportunities
This £1.4bn fund also sits in the IMA UK All Companies and has been managed by FE Alpha Manager John Wood since November 2005.
The fund is part of all three AFI portfolios and has five FE crowns with Wood similarly targeting a value style, looking for quality companies at attractive prices.
Like Buxton he has a concentrated portfolio of only 30 or 40 stocks. He tends to own companies that derive their earnings from overseas, diversifying risk away from the performance of the UK economy and its stock market.
Over the past three years the fund has returned 51.56 per cent, exactly the same as the sector average over this period, while the FTSE All Share gained 48.45 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Wood has a high cash weighting compared to most other managers in the sector, having gradually increased cash in the fund to almost 20 per cent from 13 per cent 18 months ago.
According to FE analyst Amandine Thierree the fund’s high cash weighting and value holdings should protect capital from a sharp drop in valuations.
“These are companies able to reinvest in themselves to produce sustainable growth. This results in stable returns, but also potential underperformance if markets keep behaving the way they are at the moment; that is to say rising despite limited economic recovery,” she said.
“The fund is managed in an absolute return manner, which means producing an overall positive return is more important than matching the performance of the UK stock market.”
This style best suits a sideways or falling market and Wood may lag behind peers in a strongly upward market.
Majedie UK Focus
This £474m fund has a tilt toward larger caps, five FE Crowns and a slightly less concentrated portfolio of 50 stocks, although the ten largest holdings account for more than 45 per cent of the fund’s exposure.
Chris Field and James de Uphaugh have been co-managers on the fund since September 2003 and have been joined by Matthew Smith and FE Alpha Manager Chris Reid in 2010 and 2012, respectively.
The fund has been top quartile in the UK All Companies sector over one, three, five and 10 year measures.
Over the past three years it has returned 73.54 per cent - more than 20 percentage points over the sector average.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Its largest holdings include global mega caps such as Royal Dutch Shell, GlaxoSmithKline, BP and BAE Systems.
