Investors are finally returning to UK growth funds after ditching them in a mass search for income, according to statistics published today by the Investment Association.
IA UK All Companies, which has been the worst-selling Investment Association sector for five months, saw net retail sales in June of £37.9m, which – although low – is the first positive sales figure since October 2014.
Following the low yields on offer from traditional fixed income assets, investors have been increasing their exposure to funds that invest in blue-chip stocks with high dividend yields.
This has meant that many have rotated their UK exposure out of growth and into income, causing IA UK All Companies, which is by far the largest sector in the Investment Association universe, to see a slump in sales over the last few months.
However, due to impending interest rate rises from the Federal Reserve and the Bank of England, investors have been looking more favourably on growth stocks and funds in a bid to make their cash work harder.
The UK growth fund that has benefitted the most from the increase in popularity is Vanguard FTSE U.K. All Share Index, which saw inflows of £174.15m in June, according to FE Analytics.
The £81.7m index tracker has a FE Passive Fund Rating of five and has a third-quartile tracking error of 3.67 per cent over five years. Over the same time frame it has returned 54.01 per cent, which is just 0.71 percentage points less than its FTSE All Share benchmark.
Performance of fund vs sector and benchmark over five years
Source: FE Analytics
Another fund that took a substantial amount of money over June is Old Mutual UK Alpha, which has four FE crowns and has been managed by star manager Richard Buxton since 2009.
The £2.2bn fund has suffered a bottom-quartile total return over the last 10 years due to a run of poor performance between 2006 and 2009.
However, over Buxton’s tenure, the fund has returned 87.17 per cent, outperforming its sector average and benchmark by 13.73 and 27.2 percentage points respectively.
The research team at Square Mile, which has awarded the fund an ‘AA’ rating, particularly likes Buxton’s long-term investment outlook and the rigorous research process that he uses to select stocks.
“The focus on larger capitalisation companies differentiates [the fund] from many other UK equity funds, a number of which have relied upon the recent strength of smaller and medium sized companies to outperform,” the team said.
“The manager’s approach is far-sighted and it can take time for his ideas to be rewarded. It should be noted that the approach can lead to greater volatility than other UK equity strategies and the fund’s performance may accentuate any sharp market moves, both on the upside and the downside.”
Despite its bottom-quartile annualised volatility over Buxton’s tenure, Old Mutual UK Alpha boasts a top-quartile max gain, which measures the best running return of the fund without making a loss.
Performance of fund vs sector and benchmark over tenure
Source: FE Analytics
The fund has a clean ongoing charges figure (OCF) of 0.78 per cent and yields 2.61 per cent.
Also seeing inflows over June is Invesco Perpetual UK Strategic Income, which has been managed by FE Alpha Manager Mark Barnett since 2006. This fund was a former member of the IA UK Equity Income sector.
The five FE Crown-rated fund, which is £1bn in size, saw inflows of £23.32m last month and has drastically outperformed its sector average and benchmark over the manager’s tenure, delivering a total return of 666.98 per cent.
Performance of fund vs sector and benchmark
Source: FE Analytics
Not only this, the fund is in the top-decile for numerous ratios over the same time period, including annualised volatility, maximum drawdown, alpha and Sharpe ratio, which measures risk-adjusted returns.
Invesco Perpetual UK Strategic has made its way onto the FE Research Select 100 list for its stellar track record over three, five and 10 years, as well as its popularity among the AFI panel of leading independent financial advisers.
The fund has only been in the IA UK All Companies sector for a year after it was moved from the IA UK All Companies sector after failing to hit the yield target set by the Investment Association.
The FE Research team said: “We believe it is a good thing that Barnett is focusing on companies with stable and growing dividends rather than those with the highest yield, and is not being pulled into industries with more volatile earnings. These industries could see dividend cuts in future and are less likely to grow. However, investors should be aware that if they buy the fund now the income they receive will be lower than that on many alternatives.”
“Barnett has done an excellent job of combining income with capital growth on his fund during some turbulent market conditions and has made bold calls which have made his investors a lot of money in the past.”
The fund has a clean OCF of 0.92 per cent and yields 2.96 per cent.
Our data also shows that 48 funds in the IA UK All Companies sector have seen inflows of more than £1m in June.
However, those hit with the largest outflows over the month include the likes of Scottish Widows UK All Share Tracker, M&G Recovery, Invesco Perpetual UK Growth and Halifax UK Growth.
