Marlborough UK Multi-Cap Growth, AXA Framlington UK Select Opportunities and Schroder Recovery are among the UK growth funds that have a consistently strong track record of outperforming their sector over the longer run, the latest FE Trustnet research shows.
The search for a fund that can outperform its peers year-in year-out is one that many investors obsess over but is practically impossible to fulfil, given the multitude of factors at play and the ever shifting market conditions.
Critics of active management often point out that funds which outperform in some years then go on to lag in others, making the decision over exactly which fund to buy a difficult one.
However, it is a little easier find those who have outperformed on a more consistent basis over longer time frames and in this study we attempt to highlight funds from the IA UK All Companies sector with a strong record in beating their average peer over five years, regardless of when you look at them.
To do this, we have examined the funds’ five-year quartile rankings over rolling quarterly periods going back to the start of 2000 to see which have resided in the first or second quartile the most.
While that might seem like a complicated way of looking at things, we’ve tried put ourselves in the shoes of the long-term investor who only reviews their portfolio at the end of each quarter and wants to see a healthy five-year return from each fund.
There’s a total of 44 periods involved in this, so if we turn the quartile ranking into a score then the funds that have always been in the top quartile will have scored 44 while those that never left the bottom quartile will have 176 against their name.
The table below shows the 15 highest scoring funds out of the 121 with a long enough track record. It must be kept in mind that past performance is no guide to future returns.
Source: FE Analytics
It’s no surprise to see that FE Alpha Manager Paul Spencer’s Franklin UK Mid Cap fund tops the table, given the strong run of mid-caps over the years and the manager’s highly respected stock-picking skills. It has been in the top quartile over all five-year periods looked at.
Spencer has only run the fund since February 2006 but since launch in July 1999 it’s made a 516.81 per cent total return; its FTSE 250 benchmark has risen 379.62 per cent while its average peer is up just 101.21 per cent.
Of course, a mid-cap bias will help in such a mixed sector like IA UK All Companies. When the same methodology is used for the period spanning back the start of 2007 (thus capturing funds with shorter track records), Old Mutual UK Mid Cap, Threadneedle UK Mid 250, F&C UK Mid Cap and Royal London UK Mid-Cap Growth join the Franklin offering in never leaving the first quartile.
Marlborough UK Multi-Cap Growth, which has been headed by FE Alpha Manager Richard Hallett since August 2005, is in second place; it’s been in the first quartile for 41 of the 44 periods and in the second quartile for three (all of which occurred before Hallett took over the portfolio).
While not a dedicated mid-cap fund, it does have around 45 per cent of assets in this part of the market, with 15.3 per cent in mega-caps, 20.9 per cent in large-caps and 16.2 per cent in small caps. Its top holding is Optimal Payments, followed by Betfair Group and Domino’s Pizza.
Since Hallett took over the fund it’s made a 189.85 per cent return, more than double the sector’s 90.85 per cent average gain.
Nigel Thomas’ AXA Framlington UK Select Opportunities fund has also put in a good showing for the long-term investor, returning 315.19 per cent since the manager took over in September 2009. Its average peer has made 178.74 per cent over this time.
The £4.3bn fund, which has been first quartile in all but three five-year periods, takes a multi-cap approach to UK equity investment although the star manager tends to keep at least one-third of the portfolio in large-caps while exploring the best opportunities from mid and small-caps.
Performance of funds vs sector and index since 1 Jan 2000
Source: FE Analytics
The table also shows that recovery or special situations funds have shown some good five-year returns since the start of 2000, reflecting the tendency for the value style to outperform over the long term – although it has a more difficult time of it recently.
Schroder Recovery leads this type of fund after spending 37 periods in the top quartile and seven in the second quartile. FE Alpha Managers Kevin Murphy and Nick Kirrage’s fund is often tipped by analysts for long-term investors, although its contrarian approach means that it can offer a volatile ride.
Of the other recovery funds, Fidelity Special Situations spent 26 periods in the first quartile and 15 in the second, although there were three when it was in the third quartile. The fund has had three managers over this time – Anthony Bolton, Sanjeev Shah and FE Alpha Manager Alex Wright, who is currently in charge.
Investec UK Special Situations has been a little less consistent with 28 five-year periods in the top quartile, eight in the second, seven in the third and one in the fourth.
Manager Alastair Mundy has a deeply contrarian approach, which means that periods of outperformance can be expected; he also has a cautious positioning at the moment, believing that stock prices are overvalued while a number of macroeconomic risks remain on the horizon.
Three of Invesco Perpetual’s income funds are also found on the list. All three are run by FE Alpha Manager Mark Barnett, although Invesco Perpetual High Income and Invesco Perpetual Income were headed by star manager Neil Woodford for the bulk of their track record.
These funds were in the IA UK Equity Income sector until quite recently, but still have a history of strong outperformance – especially in more difficult market conditions.
Looking at the other end of the spectrum and the Family Asset fund, which has been managed by State Street Global Advisors since May 2012, scores 175 – meaning it has been in the bottom quartile in each five-year period apart from one (when it was in the third quartile).
Source: FE Analytics
As can be seen from the above table, the funds that have most consistently been the third or fourth quartile have been large-cap trackers, which is to be expected given this approach is guaranteed to underperform the market, although a number of active funds can be seen.
