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Top-performing UK funds for the cost-aware investor

08 September 2015

FE Trustnet looks at a selection of top-performing active IA UK All Companies funds that also have low clean ongoing charges figures.

By Alex Paget,

News Editor, FE Trustnet

Fund manager fees have become an increasingly debated topic over recent years as greater transparency within the industry has put cost at the forefront of most investors’ minds.

Developments such as the Retail Distribution Review (RDR), the rise of fund platforms and the charges war between passive providers have all contributed to this trend, which is clearly a win for underlying fund buyers.

Collecting data from platforms such as Trustnet Direct, Hargreaves Lansdown, Tilney Bestinvest, The Share Centre and Interactive Investor, the latest FE Trustnet study shows that the average active fund in the IA UK All Companies sector has a clean ongoing charges figure (OCF) of 1.02 per cent – which is certainly lower than a few years ago.

Data from FE Analytics shows cheaper funds have also outperformed, with an equally weighted portfolio of the lowest OCF-boasting funds in the peer group beating the FTSE All Share by 16.86 percentage points over five years.

Performance of composite portfolios versus index over 5yrs

 

Source: FE Analytics

However, charges should never be the be all and end all in an investment decision. In fact, as the graph above shows, while the cheapest funds in the sector have outperformed an equally weighted portfolio of the most expensive funds over that time, the latter is still beating the underlying index.

Therefore, in an article later this week, FE Trustnet will take a look at a selection of UK funds which have managed to justify their expensive OCFs.

Nevertheless, lower charges give a manager a better chance of beating the market and mean an investor knows more of their money is being invested. With that in mind, but also with the caveat that the past is no guide to the future, here we highlight three top-performing UK funds which also happen to be among the least expensive in the peer group.

 

CF Lindsell Train UK Equity (OCF: 0.77%)

First on the list is FE Alpha Manager Nick Train’s five crown-rated CF Lindsell Train UK Equity fund which, with its OCF of 0.77 per cent, is some 25 basis points cheaper than the sector average.

Not only is the now £1.6bn fund cheap, though, but it has been a phenomenal performer – as FE Trustnet has noted on a number of occasions.

According to FE Analytics, CF Lindsell Train UK Equity fund has beaten the sector in every full calendar year since its launch in July 2006 and is outperforming once again in 2015. Those include top quartile and index-beating gains in 2008, 2009, 2010, 2011, 2012, 2013 and 2014.

All told, it means the fund has beaten the sector average and the FTSE All Share by 110 percentage points and 120 percentage points respectively since inception with a top decile Sharpe ratio and maximum drawdown.

Performance of fund versus sector and index since launch

 

Source: FE Analytics


 

Train runs a very concentrated portfolio of high quality companies with strong franchises. This has led him to a hefty overweight in consumer goods companies which have been phenomenal performers over recent years, though concerns have been raised over the outlook for the likes of Unilever and Diageo if interest rates do start to rise.

However, he also has a decent holding in mid and small-cap companies which have helped the fund outperform in short, sharp rallies.

As a result, FE Alpha Manager Bill McQuaker, head of the Henderson multi-asset range, says the portfolio can perform well across most market conditions.

“You’ve got half the portfolio that takes care of you if things are difficult, and then the other half of the portfolio is invested in companies that are very sensitive to the stock market, and also in companies that have got a bit of beta to them,” McQuaker said.

 

Jupiter UK Special Situations (OCF: 0.77%)

Ben Whitmore’s £1.4bn Jupiter UK Special Situations fund also has a low OCF of just 0.77 per cent.

The manager takes a contrarian approach and looks for companies which are undervalued relative to their long-term history and stocks that offer an attractive combination of low valuations and high return on capital.

This process has stood the test of time as Jupiter UK Special Situations has been a top quartile performer and has nearly doubled the returns of the FTSE All Share since Whitmore took charge in November 2006.

Performance of fund versus sector and index under Whitmore

 

Source: FE Analytics

The fund is also beating the index over one, three and five-year periods. It has been relatively consistent as well, given Jupiter UK Special Situations has outperformed the sector in five out of the last eight calendar years.

Whitmore currently holds out of favour stocks such as Centrica, RBS and BP as top 10 holdings and while it is predominantly geared towards large-caps, it is overweight mid-caps relative to the FTSE All Share, according to Style Research.

Square Mile likes the fund, giving it an ‘AA’ rating and labelling it as a good option for those investors who are willing to hold on over the longer term.

“Investors should be aware that although the longer-term cumulative returns are impressive, performance over shorter timeframes can lag the benchmark,” Square Mile said.

“The fund is unconstrained in its nature and sector positioning tends to differ markedly from the benchmark. Given this, and Mr Whitmore’s unwavering adherence and belief in his approach, this proposition is better suited for investors with a longer-term investment horizon.”

 


 

Kames Ethical Equity (OCF: 0.79%)

Rightly or wrongly, ethical funds tend to be seen as a good idea in principle, but by avoiding certain areas of the market they are likely to underperform a more traditional and unconstrained portfolio in some environments.

However, one fund which has proved that argument wrong is the £520m Kames Ethical Equity fund which is headed-up by Audrey Ryan and has a low OCF of just 0.79 per cent. It has a ‘dark green’ mandate, meaning it has a strict ethical screen.

The fund avoids companies involved in armaments, nuclear power, genetic engineering, gambling, alcohol, tobacco or pornography and those that are damaging the environment, have made political donations in the last year, test on animals, are exposed to third world debt or operate in countries with poor human rights records.

As a result of that screening, the fund has a structural bias towards small and mid-caps which has helped performance over the longer term. Ryan took over the fund in January 1999 over which time it has been a top quartile performer and beaten the FTSE All Share by more than 100 percentage points with gains of 220 per cent.

Performance of fund versus sector and index under Ryan

 

Source: FE Analytics

It is also top quartile (and beating the index) over one, three, five and 10 years after beating the FTSE All Share in seven out of the last 10 calendar years. Though it is geared towards small and mid-caps, it is also top quartile for its risk-adjusted returns, annualised volatility and maximum drawdown over the last decade.

Kames Ethical Equity counts the likes of Prudential, Vodafone, Lloyds and Severn Trent as top 10 holdings and, like Jupiter UK Special Situations, features on Square Mile’s ‘Academy of Funds’ thanks to its ‘A’ rating.

“Its 'dark green' approach does set this fund apart from many of its ethical peers, which may use a slightly more subjective framework or looser guidelines. Supporting the strategy is an experienced investment team, which also benefits from interaction with the firm's expertise in other asset classes,” Square Mile said. 

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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.