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Five recent underperformers you shouldn’t rush to sell

06 November 2014

It goes without saying that investors would prefer to hold funds when they are at the peak of their performance, then sell them as things start to go sour. But it’s worth bearing in mind that even the best funds can have blips in their track records.

By Gary Jackson,

News Editor, FE Trustnet

It’s very rare - probably impossible - for a fund to remain in the first quartile over every time frame but should investors drop a fund just because it has given some of the sector’s worst returns over recent months?

Research by FE Trustnet shows that five funds from the IMA All Companies, UK Equity Income and UK Smaller Companies sectors have seen their longstanding first-quartile returns marred by a recent fall into their peer group’s fourth quartile.

All of the funds - Cavendish Opportunities, Invesco Perpetual UK Aggressive, Schroder UK Dynamic Smaller Companies, Schroder UK Opportunities and Unicorn UK Income - have achieved first quartile returns over the past three, five and 10 years.

However, FE Analytics shows they are now in their respective sector’s fourth quartile over one year.

This may prompt some investors to review their portfolios with a view of switching into more attractive funds, but would this be premature?

Performance of funds over 1yr


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Source: FE Analytics

Richard Troue (pictured), head of investment analysis at Hargreaves Lansdown, said: “One of the hardest investment decisions to make is when to sell. I think this is much harder than the decision to buy.”ALT_TAG

“It can be tempting to react to a short-term bout of underperformance, but even if you manage to sell at the right time, it’s virtually impossible to buy-back in at the bottom. Similarly, it is all too easy to give up on a fund manager too early and it is important to try and understand the reasons for poor performance before making a snap decision.”

With this in mind, FE Trustnet takes a look at the five funds witnessing a dip in performance and examines whether investors would be right to sell out now.


Schroder UK Opportunities

The fund that has performed the worst over the past year is the Schroder UK Opportunities fund, which is now managed by Matt Hudson following the departure of former manager Julie Dean in September.

Over ten years the four FE Crown-rated fund is up 190.65 per cent, compared with a 108.53 per cent rise in its FTSE All Share benchmark and an average gain of 107.45 per cent in the IMA All Companies sector. But it’s down 11.46 per cent over one year, significantly underperforming both the index and peer group.


Troue points out that the fund has a very specific approach - the business cycle process that was developed by Cazenove Capital until its acquisition by Schroders last year. Hudson is well versed in this approach, using it on his Schroder UK Alpha Income fund.

“Over the longer term this worked well for Julie Dean and the team, but there will be times when it falters. I don’t think there is cause for undue panic following the recent weakness,” Troue said.

“Matt Hudson is developing an encouraging performance record so for those who were happy to hold through the transition I see no reason to give up now.”

Over the summer, the fund grew to £3.2bn in assets, which prompted some investors to worry that it had grown too large. However, it has since shrunk considerably and is now back around the £1bn mark.

Schroder UK Opportunities has a clean ongoing charges figure (OCF) of 0.91 per cent.


Cavendish Opportunities

Paul Mumford’s
£126m Cavendish Opportunities has made investors 140.62 per cent over that past 10 years, beating the All Share and its IMA All Companies peer group by some 30 percentage points in the process. But over one year, the fund is down 6.62 per cent.

Performance of fund vs sector and index over 10yrs

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Source: FE Analytics

Mumford prefers to invest in the small-cap space, looking at both value and growth names, and has a good track record when it comes to stock selection.

While this approach can lead to solid returns over the longer term, it has left the fund vulnerable to the sell-off in this part of the market earlier in 2014.

Troue said: “The fund has a significant bias towards smaller and medium-sized companies, which have been more volatile over the past year, and it is this bias that hurt performance more recently.” “We remain positive on the long term prospects of smaller and medium-sized companies and when this area returns to form we would expect performance to improve again.”

Cavendish Opportunities has a clean OCF of 0.82 per cent.



Schroder UK Dynamic Smaller Companies

Given its focus, Paul Marriage’s £689.6m Schroder UK Dynamic Smaller Companies fund has had a tough year thanks to the general small-cap sell-off mentioned above.

Troue adds: “This was exacerbated by some of Paul Marriage’s biggest holdings being hit particularly hard, and the fact it is a reasonable concentrated portfolio in a smaller companies context anyway.” “He has a long and successful track record though and I certainly wouldn’t write him off yet. The fund has been investing more in companies exposed to the domestic UK market as Marriage feels the UK economic recovery remains on track. In a better environment for smaller companies I would expect this fund to perform better again.”

The fund has made investors a 6.61 per cent loss over the past year, which as you can see in the graph below is much worse than the outcomes for the FTSE Small Cap (ex IT) benchmark and the IMA UK Smaller Companies sector. But over 10 years it has gained 309.64 per cent, against the index’s 91.01 per cent and the sector’s 156 per cent.

Performance of fund vs sector and index over 1yr

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Source: FE Analytics

It appears on the FE Research Select 100 list of preferred funds, where it is highlighted for its track record in limiting losses during falling markets while beating the gains when they rise again.

Schroder UK Dynamic Smaller Companies has clean ongoing charges of 0.91 per cent. It was hard-closed but recently opened to new money.


Invesco Perpetual UK Aggressive

Martin Walker’s
£248.8m Invesco Perpetual UK Aggressive fund has lost 1.87 per cent over the past year, failing to beat the broadly flat peer group. This is in sharp contrast to the past 10 years, where its 165.58 per cent advance is almost 60 percentage points over the sector.

Invesco Perpetual UK Aggressive features on the Select 100, with the FE Research team describing it as a “very punchy, concentrated fund”. However, they also note Walker’s ability to pick stocks with different risk profiles which means the portfolio can hold up even if some investments go wrong.

Troue added: “Performance over the past few years looks particularly impressive which is in part down to a great 2013 which saw Martin Walker deliver exceptional returns. He backed a number of more economically sensitive companies when they were looking out of favour and very beaten up.”

“They subsequently bounced back strongly. Several profit warnings and bad news for some individual stock has hurt performance so far this year, which shows through in our analysis as a deterioration in stock selection. While he doesn’t expect another year like 2013 Martin Walker is confident the companies which have struggled this year will bounce back and I don’t see any reason for investors to panic and sell at this stage.”

Invesco Perpetual UK Aggressive has a clean OCF of 0.92 per cent.


Unicorn UK Income


John McClure, the manager of the five FE Crown-rated Unicorn UK Income fund, sadly died earlier and leadership of the portfolio was passed to Fraser Mackersie and Simon Moon, who had worked with McClure for some time.

The portfolio has a bias to small and mid-caps, which has dented performance. Over one year it is down 1.36 per cent, compared with the average gain in the IMA UK Equity Income sector of 1.86 per cent.

Although its 10-year track record - which saw the fund rise 222.89 per cent, more than double the gain of its average peer - was built under McClure, the new managers told FE Trustnet that they were “fully indoctrinated” into the star manager’s process.

Performance of fund vs sector and index over 10yrs

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Source: FE Analytics

Troue said: “I’m reasonably relaxed about the recent underperformance of this fund. A smaller and mid-cap bias has contributed to the lacklustre performance and in a better environment for these types of company I would expect performance to improve.”

“The managers have a long-term approach with an emphasis on quality companies with decent management teams. As with any long-term approach there will be periods when it doesn’t quite work or falls out of favour and bold investors might even look to top up at times like this.”

Unicorn UK Income has a clean OCF of 0.81 per cent and currently yields 4.99 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.