Market falls of this magnitude are, as most analysts and fund managers will point out, ‘healthy’ in so far as they are not indicative of prolonged weakness.
However, after almost three years of rapidly rising markets following the prolonged weakness of the financial crisis, worries abound that valuations are stretched and global risks such as Ebola threaten to hold back sentiment.
As a recent FE Trustnet article highlighted, this meant some of the funds in the popular IMA UK Equity Income sector that held up best since the correction began were those with a diversified portfolio that featured a relatively larger exposure to mid and small cap stocks.
This may be in part due to the domestic skew in mid caps’ revenue streams, with the UK economy widely seen as healthier than much of the global market.
Performance of indices since 4 September
Source: FE Analytics
Of course, a two-month period is a much shorter period to judge a fund’s performance in than the most often cited minimum - three years – but it should go some way to show what is happening underneath a fund’s bonnet that causes it behave significantly differently to its peers when markets go down.
The Elite Charteris Premium Income, Aberdeen UK Equity Income and Allianz UK Equity Income funds lost 8.99, 6.05 and 5.72 per cent respectively between 4 September and 4 November.
The average fund in the sector lost 3.35 per cent by comparison, while the FTSE All Share lost 5.51 per cent.
Performance of indices since 4 September
Source: FE Analytics
The £17m Elite Charteris Premium Income fund is one of the smallest in the sector but has one of the largest exposures to mining, which sold off more deeply than the broader market during the correction.
Indeed, its largest holdings are all miners. BHP Billiton, Fresnillo, Glencore, Rio Tinto, Antofagasta and Randgold Resources make up a combined 35 per cent of the portfolio.
Managed by Ian Williams and Nick Walker since October 2008 the fund has been also been the worst performing fund in the sector over one, three and five years.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The fund has a relatively high yield of 4.53 per cent but as a recent FE Trustnet article highlighted, a fund’s income yield can be misleading. It has an ongoing charges figure (OCF) of 1.13 per cent.
The next worst performer over this period is the £155m Aberdeen UK Equity Income fund, managed the Aberdeen’s pan-European equity team.
The fund is also one of the worst performers in the sector over one, three and five years. It has returned 30.1 per cent over the past three years, more than four percentage points less than the FTSE All Share and more than 10 percentage points less than the average fund in the sector.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
However, the fund has been one of the highest income payers. It was named in a recent FE Trustnet study as being the 15th best income payer in the sector over three years, according to an innovative way to measure income funds devised by FE Research.
It currently yields 4 per cent and has an OCF of 0.86 per cent.
Next is the £72m Allianz UK Equity Income fund, managed by Simon Gergel since 2006.
It has similarly bad year, ranking 85th out of 87 funds over 12 months but has done better over three years, returning 39.49 per cent. This puts it ahead of the index but just behind the sector average over this period.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Gergel, probably better known for managing the £672m Merchants investment trust, invests predominantly in large caps with names such as Shell, HSBC, GlaxoSmithKline and BAE Systems all in his top five largest holdings in his fund.
However, he does have some major positions in mid and small caps such as Inmarsat and SThree.
Its yield is currently 4.38 per cent and has an OCF of 1.4 per cent.
