The CF Miton UK Value Opportunities fund is in the ‘sweet spot’ given its nimble £360m size and experienced management team, according to iBoss investment director Chris Metcalfe, who has taken the decision to max-out his exposure to the fund before it comes onto the radar of larger investors.
The fund was launched in March 2013 using FE Alpha Manager George Godber and Georgina Hamilton’s multi-cap strategy and clear value bias, which they implemented successfully during their time together on the FP Matterly Undervalued Assets fund.
Since then, its performance has attracted the attention of notable industry experts which has translated into a surging AUM as CF Miton UK Value Opportunities now weighs in at £360m, which is a hefty increase given it was launched just over two years ago.
However, while the fund is fast becoming one of the most popular UK growth funds and one of the most consensual trades in the highly competitive IA UK All Companies sector, Metcalfe has bought more units while the going is good.
“A fund we have been upping our exposure to is CF Miton UK Value Opportunities. We now hold the maximum amount we can hold in a fund across our portfolios – 4 per cent – as we think it is in the sweet spot,” Metcalfe said.
He added: “We want to get as much exposure to the fund as we can before the flows increase dramatically.”
It is understandable why CF Miton UK Value Opportunities has become one of the most wanted in its peer group.
According to FE Analytics, the fund has been the second best performing fund in the 265-strong sector since its launch with returns of 56.86 per cent, meaning it has beaten the FTSE All Share by more than 40 percentage points over that time.
Performance of fund versus sector and index since launch
Source: FE Analytics
Despite the fact that the fund focuses on out-of-favour companies and has a clear bias towards mid and small-caps, those returns have been very consistent.
FE data shows it was a top quartile performer in the remaining months of 2013 (which was characterised by strong gains), top decile in 2014 with gains of 10 per cent when the average UK All Companies fund made just 0.64 per cent and is second percentile so far in 2015.
This has led to decent capital perseveration characteristics as CF Miton UK Value Opps has the second lowest annualised volatility, best risk-adjusted returns (as measured by its Sharpe ratio) and the lowest maximum drawdown in its sector since launch.
Also, while the fund has only been in existence for 22 months, the managers have been running money with the same style for a much longer period of time. Godber, for example, has more than doubled the gains of his peer group composite with returns of 127.34 per cent since he started managing funds in August 2008.
Performance of Godber versus peer group composite since Aug 2008
Source: FE Analytics
Nevertheless, it is true that the CF Miton fund is becoming one of the most popular options in the sector, especially following of a number of high profile ‘multi-cap’ funds’ performance in last year’s difficult conditions.
Certainly, when we speak to our regular contacts, the large majority of them either use the fund within their portfolios or have it on their recommendation list. On top of that, using the market movements tool on FE Analytics we can see it is among the top 10 best-selling funds in the sector over one, three, six and 12 months.
So, given its preference to mid and small-caps (Godber and Hamilton hold just 13 per cent in the FTSE 100) and the fact it has already performed so well, is it concerning that CF Miton UK Value Opportunities is becoming so popular?
Metcalfe doesn’t think so – not for the moment anyway.
“I think it could be pretty concerning in the future but the reason we have maxed out our exposure is because the manager have a good track record and it is in what we call the ‘sweet spot’ in terms of its size,” he said.
“The managers also work well together and their approach is very complementary.”
“It is a consensual fund, but that is on the back of its performance which is natural. We just want to take advantage while it is still off most people’s radars (given it hasn’t yet got a three-year track record) and we are always looking for the next option.”
Metcalfe and his team have a good track record of selling funds they feel have grown too big just before they have gone through a period of underperformance, such as M&G Global Dividend, Unicorn UK Income and Schroder UK Opportunities which was previously managed by Julie Dean.
Following six calendar years’ outperformance relative to its sector and benchmark and an AUM which had surged from below £50m to £2.8bn in just three years, Metcalfe decided to sell the Schroder fund in December 2013 as a result of size concerns.
As the graph below shows, 2014 turned out to be a terrible year for the fund.
Performance of fund versus sector and index in 2014
Source: FE Analytics
While Dean attributed that poor performance to stock specific issues, Metcalfe firmly believes the size of its AUM was not conducive to her multi-cap and high turnover style.
“Funds don’t stay static and as soon as they start featuring on popular buy-lists or they appear in the Sunday papers, their AUMs soar. That’s what happened to Julie Dean’s fund. It did very well but, crikey, her last year was awful.”
Ben Willis, head of research at Whitechurch, is a big fan of the Miton fund and says that while he will be watching its AUM, he has no concerns at this point in time.
“That is definitely the danger because these managers want a nice comfortable amount of money but inflows can restrict the areas they invest into,” Willis said.
“It has performed well and is not one everyone’s radar and isn’t used as a core fund by most people, which is good news for us as we use the fund across our portfolios. The size will become a concern at some stage but Miton have been very good at communicating these things in the past.”
For example, the group were quick to close Gervais Williams and Martin Turner’s top-performing CF Miton UK Multi Cap Income fund after just two years when its AUM (combined with the managers’ mirror investment trust) grew to the £500m mark in November 2013.
The fund has since been re-opened as sentiment towards mid and small-caps worsened, but the initial decision will have certainly helped the now £440m to outperform its sector since its soft-closure.
Performance of fund versus sector since soft-closure
Source: FE Analytics
Ian Chimes, head of sales and marketing at Miton, is also keen to point out that the group wishes to protect the interests of existing unitholders in UK Value Opportunities as he says it has a clear plan for soft-closure.
“We have the view that as we have quite different investment strategies, some of them have capacity constraints and this is one of them,” Chimes said.
“We are hovering around the £360m mark now and will soon merge the Undervalued Assets fund which is £60m. As we are starting to approach £1bn we will start monitoring it very, very closely with the view to close it at £1.2bn.”
“Obviously, it can be a bit of a moving targeting with money coming in, money coming out and where we are in the cycle but this will never be a £5bn fund – and that is coming from the fund managers themselves in terms of their bottom-up stock selection.”
CF Miton UK Value Opportunities has a clean ongoing charges figure of 0.89 per cent.
