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Record outflows from UK equity funds: Are investors making a mistake?

29 October 2014

Investors have been selling certain high-profile UK funds en masse over the last month, but have they got their timing all wrong?

By Alex Paget,

Senior Reporter, FE Trustnet

Investors have pulled a record amount of assets out of UK equity funds over the last month, though leading fund researchers warn that they may have overreacted in certain circumstances.

The IMA UK All Companies sector was hit by record outflows of £852m in September, according to data from the Investment Management Association, putting it at the bottom of the month’s sales league.

Weaker demand for growth orientated portfolios has been given as a contributing factor towards this trend, as the UK Equity Income sector still remained the best-selling IMA sector for the fourth consecutive month with net retail sales of £606m.

However, the major reason for the pullback from the sector seems to be recent high profile manager moves and because some of the largest portfolios in the sector have been through a period of underperformance.

Schroder UK Opportunities, Threadneedle UK and two of Invesco Perpetual’s income funds are all among the list of funds which have shed the most amount of money in September, according to FE Analytics, and all three have been involved in a star manager departure recently.

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Source: FE Analytics

The now £1.5bn Schroder UK Opportunities fund has been the worst hit from the sector, as the portfolio has had to deal with £523.3m worth of outflows.

The fund had been run by FE Alpha Manager Julie Dean – who had only joined Schroders 18 months ago after the group’s acquisition of Cazenove last year.

Last month, she took the decision to leave the group and the portfolio was handed to Matt Hudson, who also joined from Cazenove and runs the Schroder UK Alpha Income fund.

Though Hudson follows the same business cycle approach as Dean, investors clearly viewed her departure as the final straw.

According to FE Analytics, the fund had been the tenth best performing portfolio in the sector with Dean at the helm – which was between December 2002 and September 2014 – and had comfortably beaten the FTSE All Share with returns of 313.72 per cent.

It also outperformed the sector and its benchmark in each year between 2008 and 2013. However, its performance over the last 12 months has been poor by comparison.

Performance of fund vs sector and index over 1yr

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Source: FE Analytics


Investors voiced concerns that its recent underperformance had either been because of its growing AUM or Schroder’s takeover of Cazenove, but Dean told FE Trustnet earlier in the year that it was down to stock specific issues.

Ben Williams, investment manager at Saunderson House, agrees that was the case.

ALT_TAG “Julie Dean was probably a bit late last year in moving out of mid and small cap cyclical stocks into defensive names and has also been caught out by a few stock specific profit warnings this year (e.g. Rolls Royce, N Brown, Xaar),” Williams (pictured) said.

“At the same time, she held positions in both Partnership Assurance and Just Retirement Group, which fell sharply following March’s Budget announcement on reforms to the annuity market.”

However, Williams says investors who sold over the last month have got their timing all wrong.

“We met Matt Hudson a number of times before he took over. He uses the same ‘business cycle’ investment approach adopted by Dean and we believe such an approach can add significant value over the medium term.”

“We moved the fund to review when it had performed extremely well and taken in probably too much money than was good for it. Now, we’re looking at doing the opposite – moving against the herd and adding to a fund which has underperformed and which is now a bit more flexible and nimble.”

The second most sold IMA UK All Companies fund was Tom Dobell’s M&G Recovery fund, which has shrunk by £223m to £5.8bn.

Dobell had been one of the darlings of the fund management industry as he had outperformed in each of his first nine years as manager of the fund. However, it has since struggled and has significantly underperformed over recent years.

Performance of fund vs sector and index over 4yrs


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Source: FE Analytics

The size of the fund, which peaked at £8bn, has been a major worry for a lot of investors, though Dobell has insisted that hasn’t been the driver of the recent lacklustre returns.

Hawksmoor’s Richard Scott says investors are fully within their rights to question the fund’s recent performance and while he still uses it, he now views it in a very different light.

“Given the performance of M&G Recovery over the past three years we feel it is wrong to regard it as an average risk, core UK equity fund which its consistently strong performance over Dobell’s first nine years as manager would have argued for,” Scott (pictured) said.

ALT_TAG “That’s where our view has changed.”

Scott and his team now regard the fund as a higher risk UK equity growth fund and use it for some of their higher risk investors, as they believe Dobell will once again outperform, but it is difficult to call exactly when.

“The portfolio has a high concentration of holdings in the ‘unloved’ stage of the process – versus the other three stages in the process – stabilising, recovering and mature,” Scott explained.

“This bodes well for the long term, as this is where the greatest undervaluation tends to be. But is also the stage at which there is the greatest risk of stock-picking error. I can understand why someone would sell it if they hold it as a core UK equity fund, but there are good arguments to stick with it for longer-term risk-tolerant investors.”


Threadneedle UK, which had been managed by Simon Brazier until he moved to Investec last month, shed the eighth amount of assets in September.

Other funds which have been hit by outflows include Invesco Perpetual High Income and Income, which are now managed by FE Alpha Manager Mark Barnett following Neil Woodford’s decision to set up his own CF Woodford Equity Income fund in June.

BlackRock UK Special Situations has been in a slightly different position, however. It has shrunk by close to £100m over the past month to £1.3bn.

It has been headed-up by FE Alpha Manager Richard Plackett since 2004 and had regularly beaten the sector during his first six years at the helm.

However, it has struggled relative to the sector over recent years and Plackett took a sabbatical earlier this year – and gave up responsibility of one of his small-cap funds.

Performance of fund vs sector since Jan 2011


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Source: FE Analytics

Plackett has since returned from his sabbatical and Ben Williams thinks investors have made a mistake by selling Blackrock UK Special Situations at this point in time.

“We don’t think now is the time to be selling,” Williams said.

“Every good fund manager goes through periods of underperformance and it’s usually the best time to buy them during these periods – not when they’re ‘top of the pops’ and first quartile over one, three and five years.”

“We rate Plackett, Roland Arnold and the team as one of the best in the UK All Companies sector and expect performance to improve as investors rotate towards the typical high quality, structural growth stocks they invest in.”

“Hopefully Plackett will come back with some fresh ideas after his sabbatical while he no longer has the responsibility of managing the team, allowing him to concentrate fully all his time on turning round performance.”

The £4.3bn AXA Framlington UK Select Opportunities is one of the surprise entrants to the list.

Run by the highly-rated Nigel Thomas, the fund was the fifth most sold in the sector with net outflows of £135.96m although there seems to be no obvious catalyst for its outflows.

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