The likes of Schroder Recovery and Old Mutual UK Equity Income are among the UK equity funds that have been the most successful at taking full advantage of a rebound in the FTSE All Share over the last 10 years, according to the latest FE Trustnet study.
The latest sell-off in the FTSE All Share has been driven by the large and mega cap parts of the market hit being much harder than the small and mid-caps, which is somewhat unusual as data from FE Analytics shows than in all the significant market corrections or more serious falls in the UK market over the past decade it has been large caps which have tended to do better.
This is because, taken broadly, larger cap stocks are more liquidly traded, have a greater tangible assets on their balance sheets and longer track records of dividend payments as well as a diversified global exposure to different revenue generating markets, rather than a bias towards the domestic economy as is the case more in smaller companies.
However, with the origin of the current crisis being a sharp fall in sentiment over Chinese economic growth the best place to have been over the past six months or so is a small or mid cap equity fund such as MFM Techinvest Special Situations or Unicorn UK Growth, which returned 9.85 and 6.85 per cent respectively since markets sold off in May while the FTSE All Share is down 10 per cent.
By comparison, funds in the IA UK Equity Income and IA UK All Companies sectors – which tend to have a majority of their exposure to large caps – have been hit far worst hit, taken on average, than those smaller cap funds, because by all appearances investors are more positive on the UK economy than the global picture in a world where China’s future appears uncertain.
Performances of sectors since 29 May 2015
Source: FE Analytics
Even small and mid cap veteran Neil Hermon, who has headed the Henderson UK Smaller Companies fund and investment trust since 2002, is expecting a sharper snap back in large caps stocks in the near term due to the hard falls in the FTSE 100 compared to other parts of the market.
“On shorter term view you are likely to see large caps outperform small caps,” Hermon said.
Given that many experts are positioning for a rally following the recent falls, in this study we are looking at periods over the past decade that have seen a meaningful period of weakness in the FTSE All Share.
Then, looking at the period between the trough date of the crash and the recovery date – when the index is back at where it was before it started to fall – we will see which funds have any commonality in adding the most alpha compared to their peers in all or most of those periods in the past.
This means they are in the top decile or quartile of the combined IA UK All Companies and IA UK Equity Income sectors, are large cap focused and have had the same manager over the period in question.
The market episodes considered are between June and October 2006 when fears ramped up about the US housing market entering a downturn subsided and the FTSE All Share recovered from a loss of 10 per cent.
Then, in March 2009 to the end of December 2010 when the market rallied from the nadir of the financial crisis’ 2007-9 plunge. After that, we analysed the period from October 2011 to February 2012 when the European sovereign debt crisis woes began to ebb away from UK stocks.
Lastly, we looked between October 2014 and January 2015 in the recovery after a host of worries including political risk and Russian’s entanglement in the Ukrainian civil war, markets sold off in September of 2014.
It is worth noting that concern remains after the most recent falls despite a modest uptick in markets and therefore positive sentiment is by no means guaranteed to return anytime soon.
Looking at funds in the IA UK All Companies sector and IA UK Equity Income sector that are solely or overwhelming focused toward large caps stocks and have the same manager at the helm during each period outlined above, we can see that there are few that the bill across every period of outperforming.
The £643m Schroder Recovery fund managed by Nick Kirrage and Kevin Murphy is first or second decile in all four periods emphasising the pair’s ‘deep value’ portfolio.
Our data shows Schroder Recovery has been a top quartile performer in the IA UK All Companies sector with returns of 114.02 per cent since the managers took charge of the portfolio in July 2006 while the FTSE All Share has returned 72.44 per cent over that time.
Performance of fund, sector and index since 2006
Source: FE Analytics
Schroder Recovery has a clean ongoing charges figure (OCF) of 0.91 per cent.
Alan Custis, manager of the £76m Lazard UK Omega fund since 2005, has also consistently beaten the index with in every period and scoring top decile in the past two.
He told FE Trustnet a few months ago that he thought large caps offered greatest value in the UK market due to their weakness, as such, he has increased his exposure to oil giants like BP, Rio Tinto and BG Group. The fund has an OCF of 0.98 per cent.
The Old Mutual UK Equity Income fund has been managed by Stephen Message since 2009 so it is can only be compared in the most recent two weak periods, when the manager was in the top decile, significantly staying ahead of the index’s move upward to its recovery date when he was in the top decile of the combined sectors.
Since Message has managed the fund it is top quartile with a return of just under 90 per cent compared to the sector’s 74.42 per cent and FTSE All Share’s 52.41 per cent gain.
Performance of fund, sector and index since 1 December 2009
Source: FE Analytics
Message is comfortable to investing in companies with a low dividend yield with the aim of securing strong dividend growth over the years. His biggest holdings include HSBC, Lloyds, Barclays and Aviva as he believes banks and financials are set to return as income stalwarts. The fund has an OCF of 0.9.
David Cumming’s £37m Standard Life Investments UK Equity Recovery was in the second decile in the most recent period, and the top performer in the second most recent, and was top decile in third most recent – which began conveniently on the manager’s first day running the fund - 6 March 2009.
The fund, which invests in companies undergoing significant change or restructuring sometimes in the mid cap space, has returned per cent since Cumming took over beating the sector and index significantly.
Performance of fund, sector and index since 6 March 2009
Source: FE Analytics
Standard Life Investments UK Equity Recovery has an OCF of 1.02 per cent.
Nick Train’s £1.6bn CF Lindsell Train UK Equity fund is top decile in the first and third most periods but failed to beat the FTSE All Share in the third and had not started trading in the fourth period.