Some 90 per cent of advisers are planning on keeping or upping their exposure to UK equities in 2016, according to the survey conducted by Cofunds, which showed that 60 per cent of advisers are recommending their clients keep their UK allocations unchanged, while almost 30 per cent are recommending an increase in exposure.
The poll also showed that half believe the UK is the best investment prospect in Europe. On top of that, 70 per cent of advisers view the UK as one of their favoured regions going into the New Year, which is well above the likes of US, Europe and Asia.
While most of the survey was based around the outlook for stock markets, 90 per cent of advisers are bullish on the UK economy for next year as well.
It’s been another difficult year for the UK index so far this year (following on from its 1.18 per cent gain in 2014) as macroeconomic headwinds in the form of China’s slowing growth, falling commodity prices and the uncertainty around future interest rates have hurt the mega-cap heavy FTSE All Share.
Performance of index in 2015
Source: FE Analytics
FE data shows the wider UK equity market is down 1.58 per cent year to date due to the poor performance of mega-caps, but investors have been able to find double-digit gains in 2015 from certain lower-cap funds which have had high exposure to the more domestically orientated FTSE 250 index.
Of course, the major debate which will now rage on is which area of the UK market offers the best value as many experts are backing the domestically-biased small and mid-cap indices to continue to lead the index, while others think a significant opportunity has opened up in FTSE 100 due to its recent falls.
Nevertheless, the results of the Cofunds survey suggests advisers are bullish on all areas of the UK market going into next year. Therefore, in this article, we ask market commentators to highlight three of their favourite UK funds for investors who want large, mid or small-cap exposure.
GVQ UK Focus – for multi-cap exposure
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, says that if advisers are bullish on UK markets and the underlying economy, then the five-crown rated GVQ UK Focus fund is an interesting proposition.
The £360m fund has been headed up by FE Alpha Manager Jaime Seaton since April 2009 and Morgan rates the fund for investors who want the market cap allocation decision made for them.
“Strictly speaking it’s an all-cap rather than a large cap fund, but I prefer that as it gives the manager more flexibility,” Morgan said.
“It is likely to have escaped the attention of most private investors, but we believe it deserves wider acclaim as it is run by an experienced, dedicated team using a robust and detailed investment process.”
“The investment approach differs from that of others in the sector including some slightly unusual ‘private equity’ style elements. It’s also very concentrated, so it’s capable of punchy performance – though there is also risk to the downside.”
According to FE Analytics, GVQ UK Focus has been a top decile performer in the competitive IA UK All Companies sector since Seaton has been at the helm with returns of 241.66 per cent, beating its FTSE All Share benchmark by 130 percentage points in the process.
Performance of fund versus sector and index under Seaton
Source: FE Analytics
Despite its all-cap bias, it has beaten the sector in every calendar year since Seaton has been in charge though it did fall slightly further than the index in 2011.
Nevertheless, the fund – which is a highly concentrated offering of just 23 holdings – has been top quartile for its maximum drawdown, annualised volatility and risk-adjusted returns (as measured by its Sharpe ratio) under Seaton.
Currently, the manager’s largest position is Aberdeen Asset Management (which makes up 9.6 per cent of his assets and it’s a member of the FTSE 100). His other top five holdings include Jupiter, Numis and Shire which sit in the FTSE 250, FTSE AIM and FTSE 100 indices, respectively.
The fund has a clean ongoing charges figure (OCF) of 0.97 per cent.
Jupiter UK Growth – for large-cap exposure
Morgan says investors have a variety of options if they want UK large-cap exposure.
For example, he says if advisers want core exposure they should look at some of the household names in the IA UK Equity Income such as FE Alpha Managers Adrian Frost and Adrian Gosden’s Artemis Income fund.
Nevertheless, following the FTSE 100’s poor run this year, Morgan says Steve Davies’ £1.6bn Jupiter UK Growth looks interesting at the moment given the manager takes a value approach to UK large-caps.
Again, it is a very concentrated portfolio and Davies splits the portfolio into two buckets – growth and recovery.
Given that approach, its very flexible mandate and Davies’ stock-picking abilities, the team at Square Mile have included Jupiter UK Growth in its ‘Academy of Funds’ and has awarded it with an ‘A’ rating.
“The strategy benefits from having a clear and welldefined investment philosophy and process and having a manager at the helm with a good level of experience within the UK market,” Square Mile said.
“The concentrated nature of this unconstrained portfolio and the manager's investment philosophy would perhaps be better suited to longerterm investors who are prepared to tolerate shortterm volatility; especially as the fund has tended to perform well in upmarkets but lag in down.”
Davies has managed the fund since January 2013 over which time it has been a top quartile performer and more than doubled the FTSE All Share with returns of 48.74 per cent.
Performance of fund versus sector and index under Davies
Source: FE Analytics
It beat both the sector and index in 2013, 2014 and is outperforming again in 2015 with gains of 3.74 per cent.
Davies’ top 10 holdings include Lloyds, Barclays and RBS as well as areas the manager thinks will benefit from the lower oil price such as International Consolidated Airlines and Thomas Cook. Jupiter UK Growth has an OCF of 1.03 per cent.
Liontrust UK Smaller Companies – for small-cap exposure
Though the small-cap index has performed well this year, many managers say they are finding decent value opportunities at the bottom end of the FTSE All Share.
On top of that, the improving outlook for the UK economy, the fact it is a relatively under researched area of the UK market and as investors can find higher levels of dividend cover within the small-cap space means many are positive on the asset class.
Thomas McMahon, fund analyst at FE Research, says if investors want to an experienced UK smaller companies team that isn’t restricted by possible capacity constraints, they could turn to FE Alpha Managers Anthony Cross and Julian Fosh’s £404m Liontrust UK Smaller Companies fund.
“The fund gives investors access to the distinctive approach of Cross and Fosh which consists of a focus on companies with strong market positions which could be due to intellectual property or control of distribution channels,” McMahon said.
“On the smaller companies fund they also focus on the management team and ensuring that their interests are aligned with shareholders through the ownership structure and the nature of their compensation.”
“Their approach has built a fund which tends to do well when the volatile smaller companies market suffers thanks to the more reliable nature of the businesses in which they invest although it can be left behind in the fastest cyclical rallies.”
According to FE Analytics, Liontrust UK Smaller Companies has been a top quartile performer in the IA UK Smaller Companies sector and beaten its FTSE Small Cap ex IT benchmark over one, five and 10 year periods.
Performance of fund versus sector and index over 10yrs
Source: FE Analytics
As McMahon points out, the managers’ focus on quality has led the fund to lag in strongly rising markets, but at the same time, has meant it has come into its own in falling ones. For example, it lost 20 percentage points less than the index in the crash year of 2008 and even ground out a positive return in 2011 when its benchmark fell 15 per cent.
This means Liontrust UK Smaller Companies, which has an OCF of 1.38 per cent, has had the lowest maximum drawdown in the sector over 10 years.
