In just three weeks the ballot papers of the upcoming 7 May general election will have been counted and the results will be known – with this most likely leading to a period of deal-making as the parties attempt to work out who can run the country with who.
It seems most investors in UK equities are gearing up for the potential for greater volatility and uncertainty around the who, how and when of the next government’s policies and their effect on markets.
Nutmeg chief investment officer Shaun Port says he is materially reducing his weighting to UK stocks over the worry: “We have been keenly focused on the general election and its potential impact on financial markets for some time. There is now a good chance no single party will claim power and a strong likelihood we’ll see a minority coalition government. This leads to uncertainty which in turn can create volatility in financial markets.
“Investors could be thinking would a Conservative-led coalition mean a higher probability of an exit from the EU? Would a Labour-SNP coalition result in another Scottish independence referendum and a sharp rise in government spending? Furthermore, it may take many weeks to form a government, rather than days, which will only add more fuel to speculation and nervousness in financial markets.”
He says as a result of this concern over the election’s potential effect on the FTSE All Share, UK equities are around a third of their usual level in a Nutmeg portfolio.
The years since the financial crisis have been characterised by rising market, with quantitative easing pushing up all stocks and creating an environment unripe for stock pickers.
However, dispersion in individual stocks has been moving up over the past year after a touching a historic low in 2014, suggesting the potential for both greater outperformance and underperformance for stock-picking managers.
For those who want UK equity exposure in funds that have shown an ability to do something different to the broader market, searching for those with a low beta – or lower sensitivity to market movements – could be useful.
Beta is the measure of volatility of a portfolio in comparison to the market as a whole, in this case the FTSE All Share. However it does not distinguish between rises and falls.
Here, we take a look at five UK equity funds that have the lowest beta across the IA UK Equity Income and IA UK All Companies sectors and are also top decile for measures of volatility over the past year. We also filtered for ones that have outperformed their peers over the longer term.
Up first is the £411m CF Miton UK Multi Cap Income fund, which is co-managed by Gervais Williams and Martin Turner and has a beta of 0.4 and annualised volatility of 7.56 per cent. However, Williams as a long-term advocate of smaller cap investing has relatively little exposure to the FTSE 100, which makes up most of FTSE All Share.
Nonetheless his volatility is also the lowest out of the whole two sectors over the past year despite small and mid-caps’ reputation as turbulent securities.
The fund has returned 82.23 per cent over the past three years, 30 percentage points more than the IA UK Equity Income sector average and almost double the gain of the FTSE All Share over the same period.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
It has a clean ongoing charges figure (OCF) of 1.56 per cent.
Second is the £187m MFM Slater Growth fund, headed by FE Alpha Manager Mark Slater. The fund has been managed by Slater for just over 10 years. Over this time it is the third best performing portfolio in the IA UK All Companies sector with a return of 270.96 per cent compared to the sector’s average of 116.81 per cent.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
Slater has a high conviction portfolio mostly of mid and small-cap stocks, which tend to have a relatively low turnover. His biggest single stock bet is the Hutchison China Meditech, a pharmaceutical and healthcare business operating mainly in China which makes up 7.18 per cent of his fund and is listed on the AIM market. He is the only manager in the Investment Association universe to have the stock – which has more than doubled in value over the past year – as a top 10 holding.
The fund’s beta is 0.48 and its annualised volatility is 10.48 per cent. It has an OCF of 0.82 per cent.
The £215m CF Miton UK Value Opportunities fund has ballooned in size over the past year when it stood at just over £50m, with the majority of the extra cash coming from inflows.
That being said, performance has been top quartile over the past year and top decile since it was launched in March 2013.
FE Alpha Manager George Godber heads up the fund with Georgina Hamilton as his deputy.
Performance of fund, sector and index since launch
Source: FE Analytics
Its beta is 0.48 also and has annualised volatility of 9.29 per cent. It has an OCF of 0.89 per cent.
Next up is the £143m Standard Life Investments UK Opportunities fund, headed up by Caspar Trenchard. Like the other funds on the list it is also a high conviction multi-cap fund. The fund took a hit in the broad midcap sell-off last year but has still managed to stay ahead of the market over three years.
Top holdings include Marshalls, Premier Foods and Fevertree drinks. The fund has an OCF of 0.9 per cent, it has 0.48 beta and 12.19 per cent annualised volatility.
Another FE Alpha Manager, Chris Hutchinson, heads up the last portfolio on our list, the £20m Unicorn Outstanding British Smaller Companies fund.
The manager has been one of the best performing managers in the UK space over the years and has been returned significantly more than the sector and index since launching the fund in 2006 and holding up well during the financial crisis,
Its beta is also 0.48 per cent but has annualised volatility of 12.38 per cent. The fund has an OCF of 0.93 per cent.