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The highly rated funds taking the biggest bets on UK large caps

11 February 2015

With analysts saying that UK large caps are starting to look attractive, FE Trustnet looks for Select 100 members that have a high allocation to this part of the market.

By Gary Jackson,

News Editor, FE Trustnet

Investors should consider adding to UK large-caps, according to analysts, as the factors that have driven their underperformance to mid-caps appear to be easing. But which UK fund managers have significant weightings to this part of the market?

Over the past decade, investors would have been much better off with exposure to the FTSE 250 over the FTSE 100. Mid-caps are seen as a better way to get exposure to the UK economy, as many members of FTSE 100 are more internationally focused with a heavy weighting to mining and oil.

As the graph below shows, the FTSE 250 has returned 100 percentage points more than the blue-chip index over the 10 years. In addition, the index has not been much more volatile than the FTSE 100 – the FTSE 250’s annualised volatility stands at 19.45 per cent, compared with 18.48 per cent for its large-cap peer.

Performance of indices over 10yrs

 

Source: FE Analytics

William Hobbs, head of equity strategy at Barclays Wealth and Investment Management, points out that a number of headwinds for mid-caps loom large in 2015. Two significant ones include the possibility of an in-out referendum on Britain’s membership of the EU and the question of when interest rates will rise, given the strengthening economy.

The FTSE 100, however, is much more heavily weighted towards mining and energy stocks than the FTSE 250, as well as many of its international peers, therefore its fortunes are more tied in with these out-of-favour markets.

Investors comfortable with the commodity exposure that comes with UK large-caps could find this space increasingly attractive, the analyst notes. The FTSE 100 is trading at a significant discount to the 250 on a range of metrics but, importantly, it is also starting to look inexpensive relative to its own history.

Hobbs said: “We are certainly warming up on UK stocks. The large-cap space looks amongst the most unloved of its developed market brethren, and the time to call the bottom in commodity markets is no doubt approaching. We are not quite there yet, but investors with space in their portfolios may want to consider starting to add to positions.”

Many of the strong gains made by UK equity funds over recent years is in part due to their moves into the mid-cap part of the market, but this left them vulnerable when investors took profits here at the start of 2014.

Given that now might be an opportune time to invest in UK large-caps, we have used data from FE Analytics and Style Research to identify the funds in the IA UK All Companies and UK Equity Income sectors that have the highest allocation to the large and mega-cap parts of the UK stock market.

We’ve also filtered for those that are highly rated by our in-house analysts and feature on the FE Research Select 100 list of preferred funds.

The Select 100 member with the biggest stake in large and mega-caps is Thomas See’s five FE Crown-rated Schroder Income Maximiser fund, which Style Research data shows as having 73 per cent of its assets in this part of the market.


Performance of fund vs sector and index over manager tenure



Source: FE Analytics

The fund’s top holding is GlaxoSmithKline, followed by Vodafone, Friends Life, BP and AstraZeneca. It currently has 44 holdings, with its largest sector bet being in financials.

The FE Research team said: “We would expect a defensive bias from the fund’s strategy, meaning it will be better at protecting investors’ capital when markets fall than making money when they rise again.”

“The portfolio is diversified and contains companies that should do well when the economy recovers. This should prevent it from lagging too far behind the FTSE All Share index in a rising market. However, the derivatives used limit the upside by their very nature and this is likely to be emphasised further during short-term rallies.”

Schroder Income Maximiser has a clean ongoing charges figure (OCF) of 0.91 per cent and currently yields 6.98 per cent. 

FE Alpha Manager John Wood’s £1.5bn JOHCM UK Opportunities fund has 73 per cent in this top end of the market, according to Style Research. Some 25 per cent of this is in the mega-cap space while 45 per cent is in large-caps. 

Wood’s largest position is in Reed Elsevier, with British American Tobacco, National Grid, Unilever and Imperial Tobacco completing its top five holdings. His largest sector play is industrials followed by consumer goods and consumer services.

The FE Research team says the fund is a good core option and highlights that it tends to favour companies that source most of their earnings from outside the UK, which means large-caps are a natural hunting ground.

JOHCM UK Opportunities has a 0.82 per cent clean OCF and yields 2.80 per cent.

Troy Asset Management’s Trojan Income fund has 69 per cent of assets in large and mega-caps. The fund, headed by FE Alpha Manager Francis Brooke (pictured), has Unilever as its top holding with Imperial Tobacco, Royal Dutch Shell, GlaxoSmithKline and HSBC in its top holdings.

Brooke prefers to invest in predictable businesses that generate substantial levels of cash and have the potential to increase the level of income paid out to investors. He also likes companies making the bulk of the profits from overseas. 

The FE Research team said: “Brooke brings stability to the fund by investing in companies that have healthy financial statements and can generate strong cash-flows despite challenging economic conditions. The portfolio has not changed much since launch, consistent with the manager’s long-term approach.”

Trojan Income has a clean OCF of 1.03 per cent and yields 3.86 per cent.

Another four members of the Select 100 have more than 60 per cent of their portfolio in large-caps: Adrian Frost and Adrian Gosden's Artemis Income with 67 per cent; Nick Train’s CF Lindsell Train UK Equity with 63 per cent; Mark Barnett’s Invesco Perpetual Income with 61 per cent; and Daniel Hanbury’s R&M UK Equity Income with 61 per cent. 


Of course, these FE Research Select 100 members aren’t the only UK funds that have established a strong track record by investing in large caps.

Richard Buxton, for example, tends to stick to this part of the market and counts HSBC, Barclays and Rio Tinto as major holdings in his five FE Crown-rated Old Mutual UK Alpha fund.

Simon Brazier was also known for playing the large-cap part of the market when he was head of UK equities at Threadneedle. His Investec UK Alpha fund currently has 56 per cent in mega and large-caps, although Brazier has only headed the portfolio for one month.


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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.