Though the fund had built up somewhat of a cult following thanks to the stewardship of former FE Alpha Manager Julie Dean, her track record and her business cycle approach to the UK market, money poured out of the portfolio following its considerable underperformance last year and the news that she had stepped down as manager.
Dean had only worked at Schroders for a year or so, following the group’s acquisition of her old employer Cazenove, but left in September to join her former colleagues Chris Rice and Tim Russell at their new venture – Sanditon Asset Management – where she will soon launch a UK portfolio.
Her Schroder UK Opportunities fund was handed to Matt Hudson, who has built up a decent track record on the Schroder (formerly Cazenove) UK Alpha Income fund, but the redemptions continued during the final months of 2014.
However, while the new manager admits that he had a lot of issues to deal with when he took on the portfolio, he is happy to see that it is now outperforming the IA UK All Companies sector and the FTSE All Share this year.
Performance of fund versus sector and index in 2015
Source: FE Analytics
“When I took over the fund, we faced some serious challenges,” Hudson (pictured) said.
“Although the core positioning was broadly in the right place, the fund had drifted into some small and mid-caps that I didn’t think were right for where we were in terms of the business cycle.”
“We started sorting out where the tail of the portfolio had drifted away and that is now completed.”
He added: “We also had the challenge of redemptions, but we got through that quite difficult period. I thought it would take until around Christmas time and I am very pleased to see that seems to be done and dusted.”
Outside of reducing the fund’s allocation to smaller companies, Hudson has been increasing Schroder UK Opps’ exposure to general financials, like Aviva, and to consumer cyclicals such as Carnival, the multinational cruise company.
There is no denying that 2014 was a particularly poor year for the Schroder UK Opportunities fund.
Dean had managed the former Cazenove fund between September 2002 and September 2014, over which time it was a top decile performer in the IA UK All Companies sector with returns of 303.12 per cent and beat the FTSE All Share by 121.03 percentage points in the process, according to FE Analytics.
Performance of fund versus sector and index between Sep 2002 and Sep 2014
Source: FE Analytics
Those returns included sector and index beating gains in 2008, 2009, 2010, 2011, 2012 and 2013.
However, 2014 was very different. Various explanations were given for its poor performance, but whatever the reason, the Schroder UK Opps was a bottom decile performer with losses of close to 9 per cent in a year when the FTSE All Share ground out a small positive return.
Performance of fund versus sector and index in 2014
Source: FE Analytics
Dean had attributed the lacklustre performance to stock specific issues and holding onto to mid-caps for too long, which certainly hindered returns.
“While there were a few stock specific issues, the biggest story – which we have realised with the benefit of hindsight – is that we should have used more of our cash flows to tilt the portfolio more towards mega-caps,” Dean told FE Trustnet in June last year.
She added: “We ran a far more balanced portfolio and while we had started to implement that directional change candidly at the back end of last year; our error was that we didn’t move more quickly.”
However, more cynical experts pointed to rapidly growing AUM as hindering Dean’s business cycle approach, which involved a high level of portfolio turnover. The likes of iBoss’ Chris Metcalfe sold the fund as result.
“The recent underperformance is not specifically down to fund flows. However, Dean did used to buy more small-caps than she does now it is bigger. Again, its size is a risk that just wasn’t there before,” Metcalfe said 12 months ago.
Schroder UK Opps had grown considerably over a very short period of time. Our data shows its AUM stood at below £70m this time four years ago, but ballooned to close to £2.8bn in February last year.
Owing to the poor performance and Dean’s departure, the fund has the third highest level of net outflows out of every portfolio in the IA universe over the past 12 months as an astonishing £1.7bn worth of units have been redeemed – leaving the fund’s AUM at a far more nimble £848m today.
Hudson says he is now comfortable with the current size and, given that he has trimmed the portfolio’s weighting to small and mid-caps, the fund has a greater degree of liquidity.
“I think £850m is a far more manageable size,” Whitechurch’s Ben Willis said. “I don’t think you can look at it any other way than, given the strategy Dean was running, it was just too big in the end.”
Willis, who is head of research at the firm, had held Schroder UK Opps for a long time but immediately sold when Dean left. Instead, he now uses the upcoming CF Miton UK Value Opportunities fund which is headed up by Georgina Hamilton and FE Alpha Manager George Godber.
Nevertheless, Willis says his decision to sell had nothing to do with Hudson as he rates the new manager due to his track record on his five crown-rated Schroder UK Alpha Income fund.
Our data shows Hudson’s £711m income fund has been a top quartile performer in the IA UK Equity Income sector and comfortably beaten the FTSE All Share since its launch in May 2005 with returns of 153.5 per cent.
It has also outperformed its benchmark in seven out of the last nine calendar years since its launch.
Performance of fund versus sector and index since May 2005
Source: FE Analytics
Though Willis says Hudson is a decent manager, he says he won’t be rushing back to Schroder UK Opps just yet.
“We were invested in the fund for a long time, but really we were investing in Julie Dean. We are happy with CF Miton UK Value Opportunities,” he said.
“The Schroder fund will be always be on our radar because we held it for so long, but – and I don’t want to knock Hudson here – he has taken over the fund during a time when UK equities have done quite well.”
“He has clearly done well because he is outperforming this year, but he has probably held onto stocks that fell a lot last year. We would just like to monitor it a bit longer.”
Nevertheless, Hudson says Schroder UK Opps is now very much his fund and that he can steer the fund back to the top of performance tables.
“We are open for business,” Hudson said. “The fund is starting to stretch is legs in terms of performance, we have a smaller asset pool and we are seeing some inflows into the fund so I am comfortable.”
“We have finished phase one and now it is time for phase two, which is to strengthen the team.”
Schroder UK Opportunities has a clean ongoing charges figure (OCF) of 0.91 per cent.