Over the last year, UK small and mid-caps have done particularly well as a result of a strong domestic economy and the election of a pro-business majority government.
Performance of indices over 1yr
Source: FE Analytics
It’s therefore no surprise that those funds which hold hefty weightings in smaller companies have done well recently, with the likes of CF Miton UK Value Opportunities, Old Mutual UK Dynamic Equity and Montanaro Equity Income shooting the lights out over the last 12 months.
In an article published last week, online wealth manager SCM warned that UK funds have been able to beat their FTSE All Share benchmark, which is weighted towards large-caps, simply by tilting their portfolios to companies further down the market-cap spectrum.
In fact, according to its research, the performance of the IA UK All Companies sector is very similar to an investment of 55 per cent in a FTSE 100 tracker and 45 per cent in a FTSE 250 tracker over five years to the end of June 2015.
“Our research is yet another nail in the coffin of the majority of active funds,” Gina Miller, co-founder of SCM Direct, said.
“Simply buying a combination of a FTSE 100 tracker with a FTSE 250 tracker, closely resembles the performance of a typical actively managed UK equities fund, while saving over 80 per cent of the annual cost (based on a typical tracker charging circa 0.15 per cent ongoing charge versus a typical UK active fund charging circa 0.85 per cent ongoing charge).”
“Following the outperformance of small and mid-cap stocks, many of these stocks now command a premium valuation compared to their larger peers. This may negatively impact the future returns of many active funds in these two major sectors.”
As always though there are exceptions and a panel of financial experts discuss the managers that are using large-cap plays to generate strong returns in the article below.
Buxton began managing Old Mutual UK Alpha as a sub-advised fund in 2009 while still working for Schroders. Over his six-year tenure, the £2.4bn fund has returned 74.73 per cent, outperforming its average peer in the IA UK All Companies sector and its benchmark by 7.07 and 22.79 percentage points respectively.
Performance of fund vs sector and benchmark
Source: FE Analytics
The fund’s high-conviction portfolio of 39 stocks typically consists of a 75-80 per cent weighting in large and mega-caps and 20-25 per cent in mid-caps. Buxton aims for the fund to be successful over the three to five-year time horizon while adopting a low turnover approach. 
Martin Bamford, chartered financial planner and managing director at Informed Choice, said: “I think Buxton (pictured) has focused on large-caps due to the very large size of the portfolio, at £2.35bn now. It’s far easier for a manager to allocate cash to large-caps than medium or small-caps when it comes to managing this amount of money.”
“His management style is long-term and low turnover, but the performance of his fund over the past three and six months has been well below average.”
Buxton’s patient approach, which generally involves long-term thematic calls, could turn restless investors pale. Over the last year, the fund has found itself in the bottom quartile and has dropped to the bottom decile over three and six months.
However, it could be argued that this may well change if small-caps and mid-caps fall out of favour in the near future. The Square Mile research team, which has given the four FE Crown-rated fund an ‘AA’ rating, warns that the fund could also experience greater levels of volatility than its peers at times.
“The focus on larger capitalisation companies differentiates it 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.”
Old Mutual UK Alpha has a clean ongoing charges figure (OCF) of 0.85 per cent and yields 2.62 per cent.
FE Alpha Manager Saviddes’ five crown-rated JOHCM UK Dynamic fund is another investment vehicle that requires investors to look through short-term losses in pursuit of long-term gains.
Since its launch in 2008, it has more than doubled the performance of its FTSE All Share benchmark and outperformed its peer group composite by 54.03 percentage points to provide a return of 11.1 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The £343m fund has fared less well over shorter time frames and has found itself in the third quartile over six months and one year, as well as in the bottom quartile over three months.
Ben Willis, head of research at Whitechurch, has just taken a position in the fund, which has a high-conviction portfolio typically consisting of a 50-60 per cent weighting in FTSE 100 companies.
“Our rationale for this has been [Saviddes’] strict disciplined investment approach, which has remained consistent over the seven-year life of the fund. Although not an equity income mandate the fund focuses on dividend producers with strong dividend growth prospects and this discipline differentiates the fund from competitors,” he explained.
“The fund can be quite contrarian and despite having exposure to oil majors and miners over the past year or so, Savvides has still managed to produce decent longer-term returns which suggests good stock-picking skills.”
Savvides uses recovery opportunities as a key theme in his fund and aims to find companies that are mismanaged, misunderstood and undervalued. Currently, the fund’s top five holdings are Royal Dutch Shell, HSBC, BP, Barclays and AstraZeneca.
FE Research, which has included the fund in its FE Research Select 100 list, said: “It is important to consider the performance of the fund over a minimum period of three years. The recovery process takes time to come to fruition and then it needs to be acknowledged by the market; therefore it is a strategy that requires patience.”
JOHCM UK Dynamic has a clean OCF of 0.74 per cent and yields 3.42 per cent.
Liontrust Special Situations has the smallest weighting towards large-caps out of the three funds listed at 40 per cent. However, this is its largest cap weighting while it holds its smallest weighting in in small-cap and AIM stocks.
It must also be noted that it is a mix of two Liontrust funds also run by FE Alpha Manager duo Fosh and Cross – Liontrust UK Smaller Companies and Liontrust UK Growth.
While Fosh focuses on large and medium companies, the smaller companies part of the fund is run by Cross.
Liontrust Special Situations, which has four FE crowns and is £1.5bn in size, is one of Parmenion’s Meera Hearnden’s favourite UK multi-cap funds.
“The fund has demonstrated consistent performance with lower than average volatility over the medium to long term. The managers have a defined process which focuses on intangible assets that generate consistent, repeatable earnings and cash flows which are under appreciated by the market,” the senior investment manager said.
“This approach has served the fund well over the longer term - the market cap of the fund is well diversified.”
Since the fund’s launch in November 2005, it has returned 216.27 per cent, outperforming its sector average and benchmark by 134.12 and 141.22 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The FE Research team has also placed this four FE Crown-rated fund on the FE Research Select 100 list for its ability to produce significant returns while protecting investors’ capital.
“This fund benefits from the best of the two fund managers, as Fosh prefers to focus on large and medium companies and Cross on smaller ones,” the team said.
“It could easily be considered as a core holding in a portfolio because it covers the broad UK equity universe and many companies are international players. We consider this fund to be one of the best available in the UK All Companies sector.”
Liontrust Special Situations has a clean OCF of 0.87 per cent.