Several of 2014’s best performing funds from the IA UK All Companies sector are amongst the worst performers this year, according to research by FE Trustnet.
Six months of underperformance from a fund with a strong track record is not necessarily a cause for concern, but the extent to which some of the top performers of last year have fallen suggest either some stock specific issues or a style shift in the type equities the market is currently favouring.
The past six months have seen worries over valuations, a lack of earnings growth and the imminent threat of rising interest rates in the US as well as the fate of the newly volatile bond market.
However, the FTSE All Share as well as the average fund in the sector has made steady progress throughout the first six months of the year, according to FE Analytics, with the average fund staying ahead of the index’s gain of 10.09 per cent.
Performance of index and sector in 2015
Source: FE Analytics
While the reasonably strong conditions have meant every fund in the sector is in positive territory year to date, some of the top performers of last year such as FE Alpha Manager Mark Slater’s MFM Slater Recovery and MFM Slater Growth funds have had a slow six months.
The former was the best performer and latter was the second best performer in the IA UK All Companies sector in 2014 but both are currently bottom decile with a return of 4.54 per cent and 8.7 per cent respectively.
Performance of funds, sector and index in 2015
Source: FE Analytics
The largest holdings don’t appear to have been a huge drag on returns. China MediaTech represents about a tenth of both portfolios and has rallied hard – more than 25 per cent – since 1 January.
Speaking to FE Trustnet this week on the funds’ performance so far in 2015, Slater said: “We’ve been reasonably active year-to-date but not as active as we were last year. There’s been some movement, but a little bit less, comparatively.”
The manager also said he sold out of HSBC recently. The bank took a hit in the first four months of the year and lost about 10 per cent, although it has since bounced back and is up year to date.
However, the manager remains unconvinced, believing that UK banks stocks will not see any major re-rating for some time to come as due to swelling compliance and regulatory costs.
Slater’s bias towards mid and small-caps does not seem to have been a problem as these parts of the market have outperformed the FTSE 100 in 2015, considerably so in the case of mid-caps with the FTSE 250 gaining nearly 15 per cent while the FTSE 100 gained 9.17 per cent.
The underperformance does not detract too far from Slater’s longer term record of significant outperformance in the funds – particularly MFM Slater Growth, which is up 167.27 per cent over five years and has more than doubled the FTSE All Share’s gain over the same period.
MFM Slater Growth is still top quartile over one, three, five years and is the sector’s third highest returning fund out of 184 over 10 years.
Elsewhere the £400m JOHCM UK Growth fund, managed by FE Alpha Manager Mark Costar, has also fallen from a top quartile spot in 2014 to bottom decile this year.
Costar has previously demonstrated an ability to beat the FTSE All Share in different market conditions with the JOHCM UK Growth fund and has clocked up five top quartile years out the past seven full calendar years.
The manager looks for undiscovered growth stocks that he believes are mispriced by the market.
This approach means that it is more likely than some other funds to underperform in the short term. For example it was fourth quartile in 2011 and 2010.
Having taken over the fund in 2001 it has gained 161.23 per cent over the past 10 years while the average fund is up 119.87 per cent and the FTSE All Share 117.64 per cent.
Performance of fund, sector and index in 2015
Source: FE Analytics
Other well-known funds to fall from the top of the sector last year to the bottom this year include Jupiter UK Special Situations, GLG UK Select, Threadneedle UK Growth & Income and CIS Sustainable Leaders.
The latter, which is managed by FE Alpha Manager Mike Fox, had two consecutive years in the top quartile – two quite different years for UK equities with 2013 a very strongly rising market and last year showing essentially sideways movement for stocks.
