Now is a good time to invest in UK equity funds, according to Tom Stevenson, investment director at Fidelity Personal Investing, even though the FTSE 100 looks close to breaking through to a new all-time high.
Although some are worried that the blue-chip index is on the brink of a correction rather than a sustained rally past the psychologically important 7,000 barrier, Stevenson points out that the UK appears cheaper than the US when it comes to price-earnings and has a 3.5 per cent yield.
He said: “What represented a stock-market bubble a decade and a half ago now looks like a market that’s neither cheap nor expensive. Valuations look reasonable for an economy experiencing an ongoing recovery from a nasty recession.”
In the article below, we look at the five funds the investment director would look to add to his own portfolio.
CF Lindsell Train UK Equity
First on the shortlist is FE Alpha Manager Nick Train’s CF Lindsell Train UK Equity fund. Stevenson says he is “very impressed” by Train’s investment approach, which rarely sees the manager make large changes to his portfolio.
“He is a Warren Buffett aficionado and shares the same buy-and-hold philosophy, picking high-quality stocks in a concentrated portfolio and sticking with them for the long haul,” he said.
Train’s fund is built around just 25 or so names, which the manager preferring durable, cash-generative business franchises that the market frequently undervalues. Top holdings include Unilever, Diageo, Reed Elsevier and London Stock Exchange Group.
As FE Trustnet has noted on a number of occasions, this approach has worked: CF Lindsell Train UK Equity is first decile over one, three and five years as well as turning in top quartile returns in seven of the past eight calendar years.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund is also well respected by the analysts, with the product winning a place on the FE Research team’s Select 100 list, holding five FE Crowns and being awarded an ‘AAA’ rating by Square Mile Investment Consulting & Research.
CF Lindsell Train UK Equity has a clean ongoing charges figure (OCF) of 0.77 per cent.
Marlborough Special Situations
Stevenson says he first met FE Alpha Manager Giles Hargreave during a visit to technology company Autonomy, when it was still off the radar of most investors.
“Giles, who manages the Marlborough Special Situations fund, has been seeking out this kind of undiscovered company ever since,” he said. “Although the companies are much higher risk than the ones that Train invests in, Hargreave compensates by running a much longer list of companies.”
Marlborough Special Situations currently has 217 holdings, with the largest being packaging business RPC Group followed by Advanced Computer Software Group and JD Sports Fashion. Some 61 per cent of the portfolio is in small caps with another 21 per cent in micro-caps; there is nothing in the large and mega-cap part of the market.
Since Hargreave took over in September 1998, the fund has made a 1,717.24 per cent return – over five times more than the average return of the IA UK Smaller Companies sector.
Performance of fund vs sector over manager tenure
Source: FE Analytics
Marlborough Special Situations has a 0.80 per cent clean OCF.
AXA Framlington UK Select Opportunities
Stevenson added: “There’s no substitute for experience when it comes to sustainable investment success, in my view. Nigel Thomas, who runs the AXA Framlington UK Select Opportunities fund, has this in spades, having been investing for more than 30 years.”
Thomas took over the £4.5bn fund in September 2002 and since then it has made investors 320.40 per cent, compared with an average return of 184.11 per cent from the IA UK All Companies sector. The fund is top quartile over five and 10 years but has slipped into the third quartile over one and three-year time frames.
Performance of fund vs sector and index since launch
Source: FE Analytics
Square Mile has given the fund an ‘AAA’ rating while it also appears on the FE Select 100. Both analysts highlight Thomas’ long-term experience in the fund management industry and his abilities as stock picker.
However, Square Mile added: “The size of the assets in the fund now impact on the flexibility of the manager and we have reservations on whether this degree of outperformance can be maintained, nevertheless, this fund remains one of the strongest in its sector.”
AXA Framlington UK Select Opportunities has a clean OCF of 0.83 per cent.
Jupiter UK Special Situations
The Fidelity Personal Investing investment director is also impressed by Ben Whitmore, who has managed the five FE Crown-rated Jupiter UK Special Situations fund since November 2006. Over this time, its 100.60 per cent return has beaten both the sector and the index by around 40 percentage points.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Stevenson said: “What struck me about Whitmore’s approach was the discipline of his valuation and quality screens. He is a contrarian investor who looks for out of favour shares.”
“While he is not as excited about the opportunities available today after six years of a rising market, I think his philosophy means he is well-placed to avoid the temptations to overpay in the later stages of a bull market.”
The portfolio’s largest holding is BP, which accounts for 5.1 per cent of assets. Also found in its top 10 are AstraZeneca, GlaxoSmithKline, BAE Systems, British American Tobacco and Hewlett-Packard.
Jupiter UK Special Situations has a 0.77 per cent clean OCF.
Old Mutual UK Smaller Companies
FE Alpha Manager Dan Nickols’ £818.3m Old Mutual UK Smaller Companies fund is the final member of Stevenson’s ‘Best of British’ shortlist. It holds an ‘AA’ rating from Square Mile and has outperformed with a 386.23 per cent return over Nickols’ time heading the portfolio.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Stevenson said: “Dan Nickols, who manages this fund, has a nicely-balanced approach using both top-down analysis and bottom-up stock picking. Like Giles Hargreave, he overcomes the inherent riskiness of smaller companies with a fairly large portfolio, which he is able to keep on top of thanks to a strong research team.”
Dan Nickols looks for qualities such as sustained above average earnings growth, profit upgrades and the opportunity for the shares to be re-rated higher in their stocks, although he generally has a pragmatic approach.
Top holdings include Ashtead Group, BTG and Restaurant Group while the largest sector weightings are to industrials, consumer services and financials.
Old Mutual UK Smaller Companies has a clean OCF of 1.03 per cent.