FTSE 250-orientated funds such as Old Mutual Equity 1, Franklin UK Mid Cap and Neptune UK Mid Cap are among the best performing UK funds over the past 12 months, according to latest FE Trustnet study, a period which has been categorised by hefty volatility and flat returns from the wider UK equity market.
Investors could be forgiven that the past year has been a good one for UK equities, given the FTSE 100 reached its historic high in February and broke through the psychological 7,000 barrier a few weeks later.
However, in price terms (therefore without dividends reinvested), the FTSE 100 is up just 0.14 per cent over the past 12 months and as the graph below shows, that has come with a lot of volatility.
Price performance of index over 1yr
Source: FE Analytics
There have been a number of reasons why UK large-caps have struggled. Firstly, there was the sell-off last September/October thanks to weakness in the eurozone, geo-political tensions and the spread of Ebola.
Also, more recently woes surrounding China’s stock markets, the Greek debt negotiations, huge falls in commodity prices and a continuation of the PPI scandal have affected some of the UK’s largest, and most internationally facing, stocks.
Nigel Cumming, chief investment officer at Canaccord Genuity, says this is quite a worrying trend given that central bank’s policies over the past 12 months have still been very accommodative – something which is likely to reverse over the coming year as the likes of the US Federal Reserve and the Bank of England look to raise interest rates.
“Despite all this noise and volatility, it is interesting to note that many asset prices are not that much changed since the year end,” Cumming said.
“Given the supportive QE backdrop this lack of progress is worrying especially with interest rate rises being suggested towards the end of this year. As the UK market has struggled to make significant progress for a while, it is particularly important to be able to spot attractive investment ideas.”
As Cumming points out, though, there have been investment opportunities in the UK over the last year and FE data shows certain funds in the IA UK All Companies and IA UK Equity Income sectors have been able to deliver stellar returns.
Source: FE Analytics
As the table shows, though, there is a clear theme in terms of those funds which have drastically outperformed – namely those biased towards the FTSE 250 index.
The top three performing funds, out of a possible 352, are all managed by the UK equity team at Old Mutual and all three have at least 70 per cent in the mid-cap index.
The best performer has been FE Alpha Manager Richard Watts’ £121m Old Mutual UK Equity 1 fund, which is only available to Old Mutual clients, as it has made hefty 36.47 per cent over the past year. It is also among the top three performing UK funds over three and five years.
Watts’ £1.9bn Old Mutual UK Mid Cap fund is second on the list with gains of 34.65 per cent, while FE Alpha Manager Luke Kerr’s five crown-rated Old Mutual UK Dynamic Equity fund – which is benchmarked against the FTSE 250 ex IT index and is a long/short portfolio – is third with its returns 27.81 per cent.
Given the performance of those funds (all of them are top decile over three and five years), Hargreaves Lansdown’s Mark Dampier recently told FE Trustnet that he was baffled that so many investors over look Kerr and Watts and tend to solely focus on Richard Buxton’s Old Mutual UK Alpha fund.
“The whole Old Mutual team are really underestimated. I am shocked that more people haven’t bought into Kerr's fund. Probably, nobody has heard of Luke [Kerr]. He is probably one of the best fund managers that has never been heard of. You never see him quoted anywhere. I am amazed,” Dampier said.
Of course, it’s not just Old Mutual funds which have taken advantage, with other FTSE 250 funds managed by Franklin, Neptune, Columbia Threadneedle, F&C and AXA IM all featuring on the list of best performing UK portfolios.
While stock-picking will have undoubtedly helped those returns, as the graph shows, just being exposed to the FTSE 250 index will have made investors wealthier over the past year.
Performance of indices over 1yr
Source: FE Analytics
A number of reasons are behind that outperformance. Firstly, with election behind us, confidence has been strengthening around the UK economy (which the mid cap index is heavily exposed to) as wage inflation has been increasing and unemployment levels have fallen.
This confidence can be shown by the fact that the FTSE 250’s P/E ratio has increased from 20 to 24 times over the past year, according to Bloomberg.
On the flip-side, the primary reason why the FTSE 100 has struggled is because of the performance of some of the index’s largest constituents, namely the miners.
BHP Billiton and Rio Tinto, for example, make up a significant part of the index and are down 27 per cent and 17 per cent respectively over the past three months as a result of fears surrounding China’s future and huge falls in the prices of commodities.
Oil & gas stocks have also struggled after the agreement with Iran promised a boost in the oil supply, as the likes of BP and Shell (which are two of the three largest publically traded UK companies) have delivered double-digit losses over three months.
Then there are the banks, which account for close to 13 per cent of the index and are down 4 per cent since April thanks to further fines from the regulator.
Performance of indices in 2015
Source: FE Analytics
This goes a long way to explain the list of worst performing funds in the UK sector over the last year. Third bottom of the list, for instance, is Tom Dobell’s M&G Recovery with losses of 2.52 per cent and it holds BP, Lloyds and HSBC as top 10 holdings.
It is a similar story with Standard Life Investments UK Equity Recovery, Schroder Core UK Equity and R&M UK Equity Long Term Recovery which are all bottom decile.
It does seem to be have been a stock-pickers market, though, as certain large-cap orientated funds have managed to buck the trend. The best example is Neil Woodford’s CF Woodford Equity Income fund, which is the top performing IA UK Equity Income fund and ninth best overall UK performer over the last year with gains of 23.84 per cent.
The fund was launched to great fanfare in June last year thanks to Woodford’s phenomenal track record at Invesco Perpetual and he hasn’t disappointed. In fact, the £6.5bn CF Woodford Equity Income has now outgrown his old Invesco Perpetual Income fund in size – as FE Trustnet recently covered.
It must be pointed out, though, that while CF Woodford Equity Income fund is heavily biased towards larger companies, 50 per cent of its outperformance has come from its small-cap holdings, according to FE Analytics.
The final fund to make the list of 10 top performers in the UK sectors is CF Miton UK Value Opportunities, which is fast becoming one of the most popular offerings with professional fund selectors.
Headed-up by Georgina Hamilton and FE Alpha Manager George Godber and using their distinctive focus on out of favour companies, the now £360m fund has returned 25.46 per cent over the past year – building on its strong outperformance since its launch in March 2013.
Performance of fund versus sector and index since launch
Source: FE Analytics
It outperformed in the remaining months of 2013, was top quartile in 2014’s tougher conditions and is top quartile once again this year meaning it has been the third best performing fund in the IA UK All Companies sector and has more than tripled the gains of the FTSE All Share since inception.
Again, however, the fund currently holds just 13 per cent in the FTSE 100 while 34.5 per cent is in the FTSE 250.
