Though the UK market has had a turbulent year so far in 2014 – the FTSE All Share is down 1 per cent year to date – due to various factors such as the strength of sterling and macroeconomic headwinds, the survey showed advisers have still favoured equities over sterling bond funds this year.
However, the survey showed the majority of advisers who are planning to change their asset allocation over the next 12 months expect to up their weighting to UK equity funds in their clients’ portfolios.
With that in mind and, as the survey revealed that FE has become the most popular ratings agency with advisers, we look at five of FE’s top-rated funds from the IMA UK All Companies, UK Equity Income and UK Smaller Companies sectors.
All of the below are mems of the FE Select 100, hold five FE Crowns and are run by an FE Alpha Manager.
Trojan Income
Investors who are looking for a core UK equity income holding won’t go far wrong with FE Alpha Manager Francis Brooke’s £1.9bn Trojan Income fund, according to FE Research’s Amandine Thierree.
FE Analytics shows the five crown-rated portfolio has been a top quartile performer in the IMA UK Equity Income sector over 10 years with returns of 149.86 per cent, although past returns are no guide to future performance. The FTSE All Share has returned 113.86 per cent.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Brookes, who has a mega-cap bias, has tended to make his money, relative to index, during more turbulent market conditions as it turned in top decile returns in 2007, 2008, 2011 and is the sector’s best performer so far in 2014.
On the flip side, the manager’s cautious approach means it has lagged when the index has soared. Nevertheless, Thierree says it is a good option for investors, especially for those who are looking for a growing source of income.
“Brooke says that the fund is a bit boring, which is not a problem if it means steady returns and low volatility,” Thierree said.
“He does not look for tremendous performance in market rallies, but is more concerned about preserving investors’ capital in real terms, adjusted for inflation – a foundation of Troy’s investment process.”
Trojan Income has a yield of 3.78 per cent and an ongoing charges figure (OCF) of 1.03 per cent.
Invesco Perpetual UK Strategic Income
The five crown-rated Invesco Perpetual UK Strategic Income fund is by no-means one of the most volatile income funds out there, but due to FE Alpha Manager Mark Barnett’s preference for mid-caps the portfolio does carry a higher level of risk than Trojan Income.
Barnett, who also took over Neil Woodford’s multi-billion Income and High Income funds this year, has managed this £920m fund since January 2006 over which time it has returned 125.05 per cent, beating its FTSE All Share benchmark by more than 50 percentage points in the process.
Barnett has also beaten the index in five of the last eight calendar years, underperforming in 2006, 2007 and the rebound year of 2009.
The manager made the decision to move the fund into the IMA UK All Companies sector this year as he was struggling to hit the income sector’s yield target. While FE Research’s Thomas McMahon says investors can expect a lower level of income than from its rivals, he is a big fan of the fund.
“We believe it is a good thing that Barnett is focusing on companies with stable and growing dividends rather than those with the highest yield, and is not being pulled into industries with more volatile earnings. These industries could see dividend cuts in future and are less likely to grow,” McMahon said.
It yields 3.31 per cent and has an OCF of 0.92 per cent.
CF Lindsell Train UK Equity
Charles Younes, who also works on the FE Research team, says that FE Alpha Manager Nick Train’s £1.1bn CF Lindsell Train UK Equity fund is a good choice for investors who want a large-cap UK growth fund.
According to FE Analytics, the five crown-rated fund has beaten both the IMA UK All Companies sector and the FTSE All Share in each of the last five calendar years and is once again top quartile in 2014.
Source: FE Analytics
Younes says this return profile is testament to Train’s high conviction buy-and-hold strategy.
“Although this is an active fund, Train very rarely changes the portfolio,” Younes said.
“This is simply because he applies a very strict investment approach, so once a stock meets his criteria, the investment case should remain and there will be no reason to sell it. Achieving this impressive performance track-record with the low portfolio turnover highlights his stock picking skills.”
“We like the consistency of his strategy, which will not vary depending on the economic conditions.”
CF Lindsell Train has an OCF of 0.77 per cent and also throws of a yield of 2.02 per cent.
Invesco Perpetual UK Aggressive
FE Alpha Manager Martin Walker, as the name of his £245m five crown-rated fund suggests, has a more aggressive approach to the UK equity market than a lot of his peers in the IMA UK All Companies sector.
It means the fund can lag in more turbulent market conditions, as shown by its bottom quartile losses so far this year.
Nevertheless, Invesco Perpetual UK Aggressive has been the third best performing portfolio in the highly-competitive sector since Walker took charge in December 2012 with returns of more than 50 per cent.
“The fund has delivered impressive performance, particularly as some stock picks have gone very wrong,” McMahon said.
“This suggests that the manager is able to get diversification benefits by picking stocks with different risk profiles, even if the overall number of companies in the fund is very low. Walker had an excellent track record on the Invesco funds he ran before taking over this one, outperforming his competitors most of the time.”
It is a concentrated fund of just 32 holdings and Walker currently has big bets on more cyclical names such as insurers, miners and oil companies. The OCF is 0.92 per cent.
Liontrust UK Smaller Companies
If advisers want to turn to UK smaller companies, but still want a level of capital protection, the FE Research team is a big fan of FE Alpha Managers’ Julian Fosh and Anthony Cross’ Liontrust portfolio.
Cross has managed the fund since January 1998, while Fosh joined him 10 years later. The £314m fund, which also has five FE Crowns, has been a top quartile performer in the IMA UK Smaller Companies sector over one, three, five and 10 years, beating its benchmark over all of those time frames.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It has also had the best maximum drawdown, which measures the worst an investor would have done if they had bought and sold at the worst possible time, in the sector over the last decade.
“It is rare to find a fund that limits its losses to half those of its peers when markets fall, yet is still capable of leading the field when they rise again,” Thierree said.
“However, much of this outperformance is due to being in the right place at the right time rather than because of any deft strategic manoeuvring by the managers.”
“FE approves of the emphasis on director ownership and believes the managers have developed a sensible method of building the portfolio – because there are just two of them, they limit the stocks they hold to the ones they know inside and out, instead of looking to capture any economic trend.”
Liontrust UK Smaller Companies has an OCF of 1.41 per cent.
