After what turned out to be a relatively flat 2014 for UK investors, the opening half of this year has proved to be more volatile and flagship funds from the likes of Old Mutual, Schroders and Threadneedle have found themselves underperforming their peers. 
Respected names such as Richard Buxton, Leigh Harrison and Martin Cholwill are lagging their respective sector’s average return over the year to date, following several straight years of being among the top funds in their sector, although commentators argue that this blip in performance should not be reason for long-term investors to sell out.
In the following article, we look at why four UK equity funds have gone from the top of their peer groups to underperform and ask what investors should do next.
Old Mutual UK Alpha
Richard Buxton has managed this £2.2.bn fund since December 2009, at first on a sub-advised basis at Schroders before he joined Old Mutual Global Investors as head of UK equities in June 2013.
The fund outperformed its average IA UK All Companies peer in 2012, 2013 and 2014 but has fallen into the fourth quartile this year with a 5.58 per cent gain. The sector is up 8.94 per cent, while the FTSE All Share has gained 8.94 per cent.
Old Mutual UK Alpha, which has outpaced the sector and benchmark since the manager took over, is one of the few funds that have managed to outperform with a bias to large-caps. Analysts say one of the reasons for its recent underperformance is due to an increased allocation to the mining sector.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Adrian Lowcock, head of investing at AXA Wealth, said: “Buxton has made some big calls with his fund such a switching into miners at the end of 2013, the fund benefited from a rebound in this sector in 2014 but a sustained recovery has yet to materialise and pressure has remained on mining stocks.”
The portfolio currently has 6 per cent of assets in the materials sector, but the highest sector exposure is financials at 30.2 per cent and consumer discretionary at 22.4 per cent. Its top holders are Aviva, Taylor Wimpey and HSBC.
“Buxton has a tendency to get in early into stocks and then wait a while until his expectations are realised. As such I still like the fund and favour it for long-term investors,” Lowcock added.
Old Mutual UK Alpha has a clean ongoing charges figure (OCF) of 0.78 per cent.
This £1.6bn fund, which run by the FE Alpha Manager duo of Kevin Murphy and Nick Kirrage, recently moved from the IA UK Equity Income sector to IA UK All Companies, but has experienced a tricky few months after a strong longer term track record.
Our data shows the fund was first or second quartile in IA UK Equity Income during 2012, 2013 and 2014 but would be in the bottom quartile over 2015 if it was still in the peer group. It’s a similar picture for the fund’s ranking in the IA UK All Companies sector.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The fund’s had a bad couple of months, but that’s no reason at all to discard it if you’re an existing investor. Some of the funds bigger holdings have struggled of late – BP, AstraZeneca and GlaxoSmithKline – but I would still back the managers to do a good job over the long term.”
Performance of fund vs sectors and index over manager tenure
Source: FE Analytics
“They have a consistent, simple approach which they stick to and there will be times they do well and times they are up against it, the last few months happen to fall into the latter camp, but it’s a really short time frame to look at.”
The managers have a contrarian-value approach, which can mean they run into periods of underperformance when markets are difficult. For example, it made a fourth-quartile loss of 8.33 per cent in 2011 when its average UK equity income peer fell 2.90 per cent but was in the top quartile for the next two years.
Aviva, GlaxoSmithKline, Vodafone, BP and AstraZeneca are the five FE Crown-rated fund’s top five holdings, while financials, consumer services and healthcare are its biggest sector weightings.
Schroder Income has a 0.91 per cent clean OCF and is yielding 3.59 per cent.
Martin Cholwill’s £1.8bn fund has been a favourite of the IA UK Equity Income sector over recent years, thanks to its consistent outperformance of both its peers and benchmark. But following top-quartile years in 2012, 2013 and 2014 the fund has dropped into the bottom quartile over 2015 with a 5.38 per cent return.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
FE Research fund analyst Charles Younes says that, “contrary to the fund’s standards”, stock selection was the main detractor from returns over recent months after strong losses were seen in mid-caps names such as BBA Aviation, Cobham and Berendsen.
In addition, the failure of contrarian bets like Shell, BG and Rio Tinto to perform in the first half of 2015 and the fund’s positions in international-facing stocks, which lagged domestic firms after the Conservatives won the general election, have hampered returns.
“As a result of this poor performance, the fund’s crown rating moved from five to four. Nevertheless I believe investors should maintain their investments in the fund,” Younes said.
“Over the last five years the fund benefitted from being heavily invested in medium-sized companies but it would be wrong to see the fund as a medium-size focused fund and take profits based on this view. I remain convinced Martin Cholwill is able to pick growing dividend-paying stocks with little consideration to the market capitalisation.”
Royal London UK Equity Income has a clean OCF of 0.66 per cent and has a 3.57 per cent yield.
Threadneedle UK Equity Alpha Income
FE Alpha Manager Leigh Harrison has worked on this fund since May 2006, with Richard Colwell joining him in September 2010. Over Harrison’s time on the portfolio, it has returned 104.57 per cent, against a 66.56 per cent average gain in its peer group and a 64.05 per cent rise in the FTSE All Share.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
The fund turned in top-quartile numbers in 2011, 2012, 2013 and 2014 but has slipped into the third quartile over the year to date with a 6.95 per cent return. This compares with respective gains of 8.64 per cent and 6.46 per cent in the sector and benchmark.
Harrison and Colwell look for undervalued stocks that other investors have ignored and take a total return approach, meaning they will buy businesses that pay low or no dividends if they expect good growth and an eventual income pay out. This fund is a more concentrated version of their Threadneedle UK Equity Income fund, which is a member of the FE Select 100.
Jason Hollands, managing director of business development and communications at Tilney Bestinvest, said: “We are big fans of Leigh Harrison and Richard Colwell, but use their UK Equity Income fund, which has also had a tougher short-term period versus peers. Alpha Income is more concentrated at 25 to 35 stocks and runs a higher small cap weighting.”
“In a high conviction fund, you can expect short term periods of significant deviation from the index and in periods of rising volatility you can go from zero to hero and vice versa very quickly, so this shouldn’t overly concern investors. The team have edged to a more defensive stance and are currently avoiding banks and commodity companies.”
Threadneedle UK Equity Alpha Income has a clean ongoing charges of 0.88 per cent and yields 4.30 per cent.