More than 97 per cent of active funds in the IA UK All Companies and IA UK Equity Income sectors have underperformed against the FTSE 100 index since the end of September, according to the latest FE Trustnet study.
Following a tough year for the UK index, the FTSE 100 has rallied back strongly over the past month thanks to a huge revival in fortune for some of its largest constituents such as mining and oil & gas companies.
FE data shows the blue-chip index has made a hefty 8.8 per cent since 29 September and the FTSE All Share is also up 7.93 per cent over that time.
Performance of indices versus sectors since 29 Sep
Source: FE Analytics
The fact that the index has rallied so strongly has had a major effect on the active funds in the two leading UK sectors.
For the bulk of this year, the ‘average’ active UK fund shied away from the likes of large-cap mining and energy names due to issues such as the huge falls in commodity prices and the murky outlook for emerging markets, but took overweight positions in mid-caps with exposure to the improving UK economy.
The oil & gas and mining sectors account for 17 per cent of the FTSE 100 and 15 per cent of the FTSE All Share.
This trade certainly paid off as between the start of 2015 and the events of ‘Black Monday’ on 24 August, when global stock markets corrected significantly thanks to concerns over a ‘hard-landing’ in the Chinese economy, an equally weighted portfolio of UK active funds had returned 0.39 per cent compared to a 7.55 per cent loss from the FTSE 100.
The significant rebound in the likes of natural resources stocks, in absolute terms and relative to defensive large-caps and domestic mid-caps, has caught out many of those funds though.
While it is a very short period of time, just seven out of a possible 322 funds (2.71 per cent) have managed to beat the FTSE 100 since the end of the September. On top of that, just 18 (5.5 per cent) have outperformed the FTSE All Share over that time.
This is certainly quite a significant shift in the dynamics of the sectors, especially when CF Miton UK Value Opportunities – which has been a darling of the industry of late – has been the only fund out of the 360 portfolios in two peer groups to have lost money in October.
Of course, like with anything fund management related, there are certain funds which have managed to buck the trend and outperform the rallying index.
Source: FE Analytics
As the table above shows, the funds that have outperformed over the period in question are those run by managers with a clear value tilt.
At the top of the list, for example, is David Cumming’s five crown-rated Standard Life Investments UK Equity Recovery which has made a substantial 14.76 per cent over the past month.
The manager’s focus on bombed-out companies has left him with a very different looking portfolio to many of his peers. For example, he counts Glencore, BP and First Quantum Minerals as top 10 holdings – which on average have made him 41.9 per cent since 29 September.
It must be pointed out, though, that the fund is still bottom quartile and underperforming against the FTSE All Share in 2015 with returns of 1.65 per cent.
Since its launch in March 2009, though, Cumming has proven to be a very capable value manager with the fund posting top quartile gains of 220.40 per cent compared the index’s returns of 147.76 per cent.
Performance of fund versus sector and index since launch
Source: FE Analytics
FE Alpha Manager Martin Walker, another advocate of value investing, has also performed well in the recent rally with all of his Invesco Perpetual UK Growth, UK Focus and Childrens funds featuring on the list.
His £220m Invesco Perpetual UK Focus fund, which is effectively a more concentrated version of UK Growth, has been the best performer of the three with returns of 10.23 per cent.
Again, though, the manager has a very high weighting to natural resources with the oil & gas and basic materials sectors accounting for a quarter of the fund’s total assets.
Unlike the Standard Life fund, however, Invesco Perpetual UK Focus is up against the index over 2015 as a whole with returns of 3.09 per cent – building on its top quartile gains since Walker took charge in December 2012.
The other four funds to feature on the list are Elite Charteris Premium Income, UBS UK Equity Income and UBS UK Opportunities. It may come as a little surprise that all three are overweight the rallying sectors.
Elite Charteris Premium Income counts the likes of BHP Billiton, Randgold Resources, Fresnillo and Rio Tinto as top 10 holdings; UBS UK Equity Income has 19.4 per cent spread across BP, Shell and Rio Tinto; and UBS UK Opportunities is also very similarly positioned.
Of course, the major question on most investors’ minds is whether this sort of performance pattern is likely to continue?
There were many managers who foresaw such a dramatic sea change happening in markets, with many suggesting that the index has become “too easy to beat” given its largest constituents had gone through such a striking period of underperformance (the FTSE 350 Oil & Gas and FTSE 350 Mining were down 21 per cent and 40 per cent, respectively, between the start of the year and 28 September).
Performance of indices in 2015
Source: FE Analytics
Richard Scott, fund manager at Hawskmoor, was one who held such concerns. While he will be sticking with active managers for his UK exposure, he says they are likely to be far more challenged than they have been over recent months.
“I think the days of making the easy call of holding 0 per cent in oil and mining stocks and buying mid-caps in order to outperforming may have run their course,” Scott said.
Scott also points out that many active managers are moving their funds more in line with the underlying index, with the likes of Standard Life’s Thomas Moore and JOHCM’s Alex Savvides upping their exposure to bombed-out mega-caps.
“You get accused of index hugging [when you buy mega-caps] which is quite funny really,” Savvides told FE Trustnet last month. “However, you will get small-cap returns from mega-cap stocks over the next three years and if you are not in them, you will miss out.”
There are those who are sticking to the positioning which has helped them out for much of this year, though.
One example is Brian Cullen on the SWMC UK fund, which although it sits in the offshore universe is still three times ahead of the IA UK All Companies sector and six times in front of the FTSE All Share so far in 2015.
The manager has been significantly overweight UK companies generating their earnings from the domestic economy but very underweight stocks that depend on international trade (he has even been shorting some of the companies which sit in the latter camp).
While this has meant his fund has had a very difficult October, he thinks investors are wrong to expect mining and oil to keep rallying as he says their rebound is purely a technical phenomenon and nothing to do with an improvement in the underlying conditions.
“Outlook hasn’t really changed. We still think some of those companies have a lot of issues so we are short a couple of miners. This is the thing that we grapple with, though. All of us [at SWMC] have had a pretty decent year but all of us have underperformed in October,” Cullen said.
Performance of fund versus index in 2015
Source: FE Analytics
“The question is, do you buy into the idea that resources companies have found a bottom, that some of these more domestic companies have done what they are going to do and now is the time to move on?”
“We don’t believe that is the case. Everyone we speak to says it is still tough out there internationally. Does China get incrementally worse from here? Not necessarily, however in terms of the valuations of some of these companies like Anglo American, they still bake in that Chinese demand for commodities will increase next year.”
He added: “We don’t see any reason why that will be the case so we are still very cautious.”
