Standard Life Investments UK Equity Unconstrained is one of the best funds in its sector over longer time frames but has suffered a recent bout of underperformance after its favoured hunting grounds sold off heavily.
Although investors are continually cautioned not to make fund moves based on short-term performance, many take a period of weakness as a catalyst to review their holdings. Given the Standard Life Investments UK Equity Unconstrained fund’s recent falls, how should investors view this portfolio now? The fund has an unconstrained, concentrated and all-cap approach and pays little attention to how UK stock market indices look. It tends to have a high active share, which shows how different the portfolio is from the market.
Ed Legget (pictured) has managed the £1.1bn fund since April 2008, over which time it has returned 162.60 per cent. This compares with an average return in the IMA UK All Companies sector of 47.38 per cent and makes it the peer group’s second best performing fund.
It’s also the top performing fund over three years with a 92.63 per cent return and the tenth best over five years with a 116.61 per cent gain.
Performance of fund vs sector over 3yrs
Source: FE Analytics
However, performance has dipped over more recent time frames and Standard Life Investments UK Equity Unconstrained has dropped into fourth quartile over one year and six months.
In the past 12 months, the fund has lost 0.05 per cent while its average peer has gained 2 per cent. Over six months it had shed 6 per cent against an average loss of 2.15 per cent in the sector.
Standard Life Investments UK Equity Unconstrained’s formal benchmark is the IMA UK All Companies sector, but it chiefly operates within the FTSE 350 ex Investment Trusts index.
Stuart Ryan, investment manager at Holden & Partners and a member of FE’s AFI panel, notes that this explains some of its recent underperformance.
“Using the FTSE 350 ex Investment Trusts as a starting point is quite unique and will give Ed exposure to areas of the market which have suffered over the short term, like mid-caps,” he said, highlighting the fact that some 54.2 per cent of the portfolio is in FTSE 250 names.
While the FTSE 250 has performed strongly over three years with its 66.27 per gain outpacing the rise in the FTSE 100 by some 30 percentage points, things have been tougher for the index over 2014 so far. As the below graph shows, mid-caps have underperformed their larger rivals over the year to date.
Performance of indices over year to date
Source: FE Analytics
Ryan says he is happy to continue holding the fund so long as Legget stands by the well-established process behind it.
“We’ve used the fund in our model portfolios for growth and more adventurous clients for a couple years now. We’ve maintained our view on the fund as it did was expected over the period in question. [The recent underperformance] is more of a sector issue rather than a manager issue,” he said.
Mike Deverell, investment manager at Equilibrium Asset Management and an AFI panelist, has never invested in the fund despite it being on his firm’s radar for a number of years.
“What you can pretty safely say with this fund is that when markets are going up it tends to outperform and it can outperform by quite a long way. But the reverse is true - when markets aren’t doing so well, it tends to underperform quite dramatically,” he said.
The fund’s calendar history shows this clearly. In the down years of 2008 and 2011 fund lost a respective 41.05 per cent and 20.47 per cent, compared with the sector’s 31.96 per cent and 7.04 per cent falls.
But in the bull years of 2012 and 2013, it returned 44.14 per cent and 43.33 per cent, against its peer’s 15.05 per cent and 26.21 per cent advances.
“Now might be a good time to buy after a period of recent underperformance but frankly it depends on your view on the market,” Deverell argued.
“The first thing you should do with funds like this is take a view on markets. If you think markets are going to go up then this fund is a really good play but you have to be aware that you’re taking a lot of risk by doing that. If markets go the other way you could lose a lot.”
Because of this, he views Standard Life Investments UK Equity Unconstrained as a ‘hold’ for more adventurous clients, as a longer investment horizon is warranted.
Andy Parsons (pictured), head of investment research and advisory services at The Share Centre, is a fan of the fund and says its recent performance is to be expected given its unconstrained approach.
“I can’t get wrapped up about short-term performance issues. I want to see stability and longevity of performance over a minimum of three or five years and the track record shows that. Also, Legget is first quartile for alpha over three years,” the AFI panelist said. “I like managers who show the ability to back their convictions and Legget has consistently shown over time an ability to stock pick. I would always expect a fund manager to have periods where the portfolio struggles to a degree because of the way they manage money otherwise they are continually rotating.”
“I want them to stay true to their convictions and appreciate that markets go through cyclical phases, meaning they will underperform over time.”
When it comes to how the fund should be used, Parsons says it shouldn’t be necessarily ruled out for balanced or cautious investors as it can “provide a punch to a portfolio”, although its relatively higher volatility means it is best blended with two or three more conventional UK funds that can act as “dampeners”.
FE Analytics shows Standard Life Investments UK Equity Unconstrained has annualised volatility of 21.81 per cent over the past five years. This compares with an average of 14.41 per cent for the sector and makes it the second most volatile fund out of its peers.
Holden’s Ryan agrees that blending the fund can be a good way; his firm uses it alongside Richard Buxton’s Old Mutual UK Alpha fund, which has the bulk of its assets in the mega and large-cap parts of the UK stock market.
“They both work really well together in that UK space,” he said.
Standard Life Investments UK Equity Unconstrained has clean ongoing charges of 1.15 per cent. The fund appears in the aggressive, balanced and cautious AFI portfolios and is rated ‘A’ by investment fund consultancy Square Mile.
