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Experts dump AXA Fram UK Select Opps: Should you follow suit?

27 February 2015

A recent FE Trustnet study showed that fund of funds managers have been selling out of Nigel Thomas’s £4.5bn AXA Framlington UK Select Opportunities fund en masse over the last year, so we ask the experts whether private investors should do the same.

By Alex Paget,

Senior Reporter, FE Trustnet

The IA UK All Companies sector is home to some of the most well-known, experienced and successful fund managers in the business and one of the most popular of these over the past decade or so has been Nigel Thomas.

Thomas (pictured), who is a growth-orientated manager, has been managing money for more than three decades and has run the flagship AXA Framlington UK Select Opportunities fund since September 2002.

According to FE Analytics, the fund has been a top decile performer in the sector over that time with returns of 320.54 per cent. As a point of comparison, the FTSE All Share has returned 120 percentage points less than Thomas’s fund over that time.

Performance of fund versus sector and index since September 2002

 

Source: FE Analytics 

Our data shows those returns have been very consistent: Thomas has beaten the sector average in 10 out of the last 12 full calendar years since he has been at the helm and has beaten the wider index in nine of those years.

On top of that, AXA Framlington UK Select Opportunities has been top quartile for its annualised volatility and top decile for its risk-adjusted returns, as measured by its Sharpe ratio, under Thomas’s guidance.

Due to its strong performance and Thomas’s disciplined GARP (growth at a reasonable price) strategy, AXA Framlington UK Select Opportunities fund has been a firm favourite with both private and professional investors alike.

In an FE Trustnet study in January 2014, we revealed that the portfolio was the most popular IA UK All Companies offering with fund of funds managers: 37 of them counted it as a top-10 holding. 

However, we conducted the same study this week and it revealed that the experts have been selling the now £4.5bn fund en masse over the past 12 months. It is now the 10th most popular portfolio in the sector, as only 12 multi-managers hold it in their top 10. 

So, should private investors follow in the footsteps of the experts? To answer that, we must look at the three reasons given for why some managers have sold the fund: namely its relatively poor returns over recent years compared with its history; its size; and the possibility that Thomas may retire over the coming years.

In terms of recent performance, it certainly seems that relative returns have dropped off – the only two years it has underperformed since Thomas took charge were in 2012 and 2014.


 

Source: FE Analytics 

While some experts would suggest that this is a reflection of Thomas reverting back to the mean, Ian Rees – fund manager at Premier – says investors should not be concerned.

“I don’t think there are any issues with the performance of the fund since 2013,” Rees said.

“He performed very well in 2013, which you would expect as it was a rising market, and in 2014 he gave some of that performance back – which is what you would expect given that he has a high weighting to the FTSE 250, which had a poor year.”

“I do get frustrated when people make judgements about a fund’s performance without looking at the drivers behind it.”


As the manager points out, the AXA Framlington UK Select Opportunities fund has returned 36.01 per cent since January 2013, meaning it has narrowly outperformed the sector and index over that time.

Performance of fund versus sector and index since Jan 2013

 

Source: FE Analytics

Rees is therefore concerned that so many managers have been selling AXA Framlington UK Select Opportunities, especially if the reason is due to the performance.

“I find it quite disconcerting that it has been removed from so many people’s portfolios. This is a great manager and when you see how he performed in 2013, I would have been saying hold off from buying the fund and wait for a soft-patch.”

“We have now had that so now is the time to buy, more than anything else. It just seems that most fund buyers are simply following performance, which is very worrying.”

However, Rees agrees that the size of the fund – which is now £4.5bn, but had been £5bn at points last year – is an issue.

“Personally, I am uncomfortable with the size, especially as it has a third in the FTSE 250,” Rees said.

“That means Thomas has £1.5bn in mid caps and there was a very famous fund, Andy Brough’s Schroder UK Mid 250, which had significant problems when it reached a similar size and struggled as a result.”

AXA IM has had to field various questions about the size of Thomas’s flagship fund recently. In an article this time last year, Rob Bailey, head of UK wholesale distribution at AXA IM, said Thomas had no issues with capacity. 

“We do not have concerns over ‘capacity constraints’ as we closely monitor and review all of our funds at prescribed intervals,” Bailey said.

“With its low turnover, it is well suited to long-term investors and the fund has continued to outperform even though it has been growing consistently over the 10-plus years that Nigel has been running it.”

Ben Willis, head of research at Whitechurch, says that though the fund’s increasing size has meant Thomas has had to change the way he runs money, it isn’t something he is overly concerned about.

“[Thomas] has successfully adapted a multi cap fund to accommodate over £3bn in assets,” Willis said.

“The fund used to be a third each in small, mid and large caps, but due to its burgeoning size, Nigel Thomas has managed to adapt the fund and is able to manage it with a breakdown much more skewed to large caps at the expense of the small caps.”

FE data shows that Thomas currently holds 56.7 per cent of the fund’s assets in the FTSE 100, 28.33 per cent in the FTSE 250 and the rest across the FTSE Small Cap and AIM indices. He also has 3 per cent in cash.

The final concern is that Thomas may soon retire and those fears have intensified, given that the group has made public that there is a succession plan in place for Chris St John – who works closely with Thomas and runs the AXA Framlington UK Mid Cap fund – to take charge when Thomas does eventually step down.


However, Rees says that this is no reason for an investor to sell now as “the possibility of Thomas leaving has been a realistic concern” for five or six years and is therefore of no greater importance now than it has been over the recent past.

Performance of fund versus index since Mar 2011

 

Source: FE Analytics 

On top of that, backers of UK Select Opps point out that St John has performed well since he launched the AXA Framlington UK Mid Cap fund in March 2011. Our data shows it has returned 90.9 per cent over that time, beating its benchmark by more than 30 percentage points in the process.

However, one wealth manager who has recently sold AXA Framlington UK Select Opps said that while St John has done well, he hasn’t really been tested in “choppier markets” and he may struggle “once legions of Thomas’s loyal punters start selling the fund”.

Nevertheless, for those investors already in the fund, Rob Morgan – pensions and investment analyst at Charles Stanley Direct – says they can afford to hold onto Thomas’s portfolio as he expects it to bounce back.

“I still rate the fund. Thomas is a top quality manager and he has a good team around him including Chris St John, the eventual successor. Thomas has no immediate plans to retire, I understand, but AXA Framlington has done a good job in succession planning well in advance,” Morgan said.

“I think possibly the lack of stand-out performance in recent years, added to the fact that Thomas will inevitably exit at some stage, are the probable reasons for the fund size shrinking, though I don’t have any concerns about things at the moment as Nigel Thomas is still firmly at the helm.”

AXA Framlington UK Select Opps has an ongoing charges figure of 0.83 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.