Only 10 out of 361 UK equity funds have provided a positive total return since the FTSE 100 sell-off began at the end of May, according to data from FE Analytics, while a total of 284 of all UK equity funds have provided a negative return of more than five per cent over these last few weeks.
Table of top 10 performing UK funds since end of May 2015
Source: FE Analytics
The FTSE sell-off has left many investors fearing a correction, due to a combination of the stock market slide in China, the ongoing Greek debt crisis and a slump in metal and oil prices.
As a result, blue chip stocks such as BP and Royal Dutch Shell have plummeted in price by 6.64 per cent and 8.69 per cent respectively since the end of May, according to data from FE Analytics.
Unsurprisingly, then, it is the funds that invest in small or mid-cap companies and stray away from the benchmark that have provided the highest returns recently.
Simon Evan-Cook, senior investment manager for the Premier Multi-Asset team, says a stable election outcome in May is likely to have been a large contributing factor to the outperformance of funds that own smaller companies.
Performance of indices since end of May 2015
Source: FE Analytics
“There are a couple of reasons for this - one is [small-caps] have underperformed for quite a while before that so I think there’s an element of mean reversion there,” he explained.
“Another reason is that, going into the general election, they had the weight of the expectation of an unclear result in front of them. All the polls were suggesting it was going to be a hung parliament at best and potentially months of wrangling over who was going to be in government.”
“Given that smaller caps have got more of a domestic focus than large caps, a lot of doubts over small-caps were cleared away. That has certainly helped them through this period.”
Out of all the funds in the IA UK All Companies and IA UK Equity Income sectors, MFM Bowland came out on top over the given time period, providing a return of 2.54 per cent
Now run by Hargreaves Hale, the £10m fund may be off of many investors’ radars due to its small size, its high 7 per cent entry charge and the fact that it’s not widely available.
The second top-performing UK equity income fund is Elite Webb Capital Smaller Companies Income & Growth which, managed by Peter Webb since 2012, is also not widely available among retail investors has an even smaller value of assets under management at just £4.2m.
However, in third place is CF Miton UK Multi Cap Income, which is more of a household name and has returned 0.8 per cent from the end of May, outperforming its peer average in the IA UK Equity Income sector by 6.48 per cent.
Performance of fund vs sector since end of May 2015
Source: FE Analytics
Despite being a multi-cap portfolio, the £437m fund has a long-term bias towards mid- and small-caps and has a 35.2 per cent weighting in FTSE AIM stocks, which explains its ability to outperform during the recent poor market performance.
While they have posted small losses, other small-cap biased income funds such as Unicorn UK Income, PFS Chelverton UK Equity Income, Marlborough Multi Cap Income and MFM Slater Income all sit in the top decile since the end of May.
Managed by Gervais Williams and Martin Turner since its launch in 2011, the five FE Crown-rated Miton fund has also performed well over the longer term and boasts a total return of 102.37 per cent, outperforming its sector average by 55.53 per cent.
All the other funds to have achieved a positive return since the end of May are from the IA UK All Companies sector, including MFM Slater Recovery, which has returned 0.61 per cent.
FE Alpha Manager Mark Slater, who has run the fund since its launch in 2003, aims to invest in companies that are undergoing structural or management change, which may be volatile in the short term but provide greater growth opportunities over the longer term.
Despite this, the £31.2m fund hasn’t been overly volatile over the last few months largely as a result of its high weighting to small and mid-caps.
Adopting a similar investment technique, FP Miton Undervalued Assets fund is managed by FE Alpha Manager George Godber and has also achieved a positive performance since the end of May, returning 0.2 per cent.
ConBrio Sanford Deland UK Buffettology, managed by Keith Ashworth-Lord, is another which has weathered the recent volatility well.
It also aims for value to an extent by investing in mid- and –small-caps, adopting Warren Buffet’s ideology that it is preferable to buy high quality companies at an attractive price rather than buy mediocre companies at a very cheap price.
This philosophy appears to have worked, as the £18.4m fund has achieved a positive 0.25 per cent return since the end of May. It has also done well since launch, outperforming its sector average by almost double.
Performance of fund vs sector since launch
Source: FE Analytics
Mark Dampier, head of research at Hargreaves Lansdown, believes that small- and mid-caps provide great opportunities over the longer term as well, and not just while markets are falling.
“If the market falls lots and lots, then yes small caps will eventually fall too, but I have to say that I view a fall as a buying opportunity most of the time – it’s very cliché to say that but, unless you think it’s the death of capitalism, falls in markets are usually buying opportunities,” he said.
“If [the market] fell another 10 per cent that would be great. I think there’s a lot of cash, there’s a lot of doom and gloom, the Greece and China stuff is already known and it’s mostly priced into the market. You get a bit more volatility and it’s an opportunity to buy I think, not sell.”
“Mid and small cap areas are where you find the best active fund managers, in my view. The more doom and gloom I hear from the media, the more bullish I become.”
Given that small-cap orientated funds have dominated the top of the sector tables during the recent sell-off, it is unsurprising that mega-cap portfolios litter the IA UK All Companies peer group’s bottom decile.
These include the likes of Halifax Special Situations and Scottish Widows UK Select Growth which down 9 per cent since the end of May, as well as FTSE trackers run by the likes of Virgin, Aviva, Vanguard and M&G.