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Investment Quorum: The UK funds to buy for a volatile three years

21 July 2015

Investment Quorum’s Petronella West reveals to FE Trustnet why she thinks defensive equity funds placing a high importance on total return will best favour a low returning and volatile three years ahead.

By Daniel Lanyon,

Reporter, FE Trustnet

Fund managers such as Neil Woodford, Nick Train and Terry Smith specialising in ‘high quality’ growth and income equities are best placed to navigate a volatile and low returning next three years, according Petronella West, director at discretionary fund managers Investment Quorum.

The UK equity market has been the standout performer in recent months in contrast to almost every other asset class which have been hit by worries over plummeting Chinese stocks and Greece’s eurozone woes.

As FE Trustnet recently pointed out over the past three months the more equity funds across all sectors in the Investment Association universe are in negative territory – as are most fixed income funds – except in the UK equity space where just over half of funds across the IA UK All Companies, Smaller Companies and Equity Income sectors have posted a positive return.

West says while the IA Equity Income has been the most pressured of the three, in anticipation of further difficulties for equity markets, including the UK’s, the firm are looking to hold funds where there is a strong emphasis on dividends while also taking ‘strategic’ bets in the mid cap space.

"We just don't think there are returns from bonds or cash - just like everybody else - but we don't think that volatility in the market with triggers from Greece and China are going to cause dramatic falls. We think the US will be a bit lacklustre with the strengthening of dollar and interest rates. They are not going to have a year like they did last year.”

“Where are people going to put their money?” she said.

“Taking that view, we think over the next three years capturing total return by investing in companies where there is strong dividend growth, strong dividend cover and balance sheets via fund managers is what we want in our portfolios.”

“For the next three years or so we’ll prefer the likes of Neil Woodford, Nick Train or Terry Smith. We also definitely do see good things in small and mid-caps and will add to them strategically.”

Woodford, Smith and Train are some of the best known names in within the equity income space thanks to their long track records which have clearly been helped by taking long-term bets.

For example Nick Train, who has taken a concentrated approach focusing on quality companies in both his CF Lindsell Train UK Equity fund and Finsbury Growth & Income Investment Trust, has seen both vehicles dominate their respective sectors.

According to FE Analytics, his £1.6bn open-ended fund has been a top decile performer in the IA UK All Companies sector since its launch in July 2006 with returns of 194.91 per cent, nearly tripling the gains of the FTSE All Share in the process.

Performance of fund versus sector and index since launch


Source: FE Analytics

West says to add alpha in what will be a lower return in environment that then previous three years the firm will be using the likes of the £1bn Franklin Templeton UK Mid Cap fund run by FE Alpha Manager Paul Spencer.

The fund is top decile over five, three and one years, and is the third best performer in the sector out of 199 funds (and more importantly has comfortably beaten its benchmark) since Spencer took over in February 2006 with a 256.83 per cent return.

Performance of fund, sector and index since 2006

Source: FE Analytics

West says they have previously used passive exchange traded funds but she says there is some worry that they suffer liquidity problems in the event of a market collapse.

“The idea is to blend in Franklin Templeton UK Mid Cap [with defensive equity funds] and get return that way but really it is all about total return - dividend income plus capital upside because markets will be volatile. To capture that we think we need to be much more active than just following a passive fund.” 

“Imagine everybody rushing for the door at the same time is what worries me most about these ETFs is everyone going for the door at the same time. These funds are massive, absolutely massive and so that worries me.”

“We do quite a bit if analysis on the ETFs we do buy and do have a passive portfolio and the jury is out but over the past four years we have found - using the same asset allocation - that our equivalent active strategy has outperformed our passive strategy so we believe we can add alpha that way.”

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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.