MFM Slater Growth, CF Miton UK Value Opportunities and Trojan Income are some of the bottom-up funds that have surged over the past two years, making double-digit gains while the index has struggled to keep its head above water.
Think back to the start of 2014: the FTSE 100 was above the 6,700 mark (noticeably higher than the 5,900 it has found itself at today) after loose monetary policy and gradually improving investor sentiment helped the index recover from the depths of the financial crisis – albeit with some bumps along the way, such as the 2011 eurozone debt crisis.
At the time, many investment commentators were arguing that it would be prudent to focus on stock-picking funds that hunt for the best opportunities, rather than those that simply ride the index higher.
As the below graph shows, the FTSE 100 and the wider FTSE All Share made rather disappointing returns between the start of 2014 and the end of 2015, with the blue-chip index even losing money over this two-year stretch.
Things have been better further down the market-cap spectrum with the FTSE Small Cap gaining just over 10 per cent and the FTSE 250 rising more than 15 per cent.
Performance of indices in 2014 and 2015
Source: FE Analytics
The image also illustrates just how different the two years were, even if we’ve ended up broadly where we started in the FTSE 100 and All Share.
While stocks spent most of 2014 trading in a 5 per cent margin either side of zero, 2015 saw the indices reach record highs at the start of the year only to come crashing down over the summer and spend the rest of the year bouncing around.
Looking back over these two years and we can see that the average UK fund had a better time of it than the market. In the IA UK All Companies sector, the average member was up 5.54 per cent while the typical IA UK Equity Income fund made 9.55 per cent; in IA UK Smaller Companies the figure stands at 12.97 per cent.
Given the strong run in the mid-cap space it might come as no surprise to see that funds with a willingness to invest outside of the UK’s largest companies have been some of the best performers of recent years.
Dedicated mid-cap funds such as Old Mutual UK Mid Cap and Neptune UK Mid Cap can be found on the list of the 10 best IA UK All Companies funds over the two years in question.
Source: FE Analytics
The Old Mutual offering, which is run by FE Alpha Manager Richard Watts, combines macroeconomic research with stock selection in its process. This aims to identify the sectors that look most attractive according to the market cycle and then find the best companies within them.
Mark Martin’s Neptune UK Mid Cap fund, on the other hand, has seen the bulk of returns generated by stock selection rather than macroeconomic views. The manager runs a relatively concentrated portfolio split into three silos of economic recovery, structural growth and corporate turnarounds, with a focus on value.
Topping the table, however, is FE Alpha Manager Mark Slater’s £338.3m MFM Slater Growth fund, with its 38.47 per cent total return. Slater also has another fund – MFM Slater Recovery – in the third slot after it made 34.99 per cent over the two years.
The manager specialises in finding companies that have reliable, above-average earnings growth supported by healthy cash flow. He will only invest in these businesses when the price/earnings ratio is attractive relative to the growth rate.
This approach has paid off for Slater over the long term. FE Analytics shows he has made a 302.07 per cent return since the start of 2000 (which is as far back as our data on the manager goes), which is a significant outperformance of the 85.57 per cent gain made by his peer group composite.
Performance of Slater vs peer group composite since 2000
Source: FE Analytics
Coming in second is the £618.4m CF Miton UK Value Opportunities fund, which is run by FE Alpha Manager George Godber and Georgina Hamilton, after it made 35.38 per cent in two years.
The duo search for businesses that look undervalued on a bottom-up basis and have a number of ‘safety checks’ in place to make sure they aren’t buying value traps. The value approach can means periods of underperformance, but the fund is currently the third best performer in its peer group since launch in March 2013.
The managers’ FP Miton Undervalued Assets also appears on the list in ninth place thanks to a 28.81 per cent total return. Miton plans to merge this fund into CF Miton UK Value Opportunities in early 2016.
Another stock-picker that has done well over the turbulent last couple of years is Keith Ashworth-Lord. His Premier ConBrio Sanford Deland UK Buffettology fund is up 29.07 per cent over 2014 and 2015.
Ashworth-Lord has exclusive rights to use the name of investing legend Warren Buffett and a 10-year licence period to copy the investor’s distinct long term, value-orientated approach within a UK equity fund. Since launch in March 2011, the fund has made 98.33 per cent against a sector average of 35.72 per cent.
If we look to the IA UK Equity Income sector, we’re also seeing that stock-picking funds with an ability to look outside of the market’s biggest names have been well rewarded over recent years.
Source: FE Analytics
Charles Montanaro’s Montanaro UK Income fund tops the table here with a 23.46 per cent over the two years in question.
The fund focuses on stocks in the mid and small-cap spaces. According to Style Research, it has 41 per cent of assets in mid-caps and 53 per cent in small-caps, which will have aided performance over recent years.
This trend can also be seen in some of the other top-performing UK equity income funds as both Gervais Williams and Martin Turner's CF Miton UK Multi Cap Income and Slater’s MFM Slater Income are examples of funds known for their willingness to look outside the FTSE 100 for compelling investment opportunities.
Thomas Moore’s Standard Life Investments UK Equity Income Unconstrained is another stock-picking fund that has thrived over recent years. As the name suggests, the manager pays little attention to the benchmark when constructing his portfolio and, like many of the funds mentioned in this article, has a bias towards value investments.
FE Alpha Manager Francis Brooke, who runs the Trojan Income fund, also features on the list after making 21.74 per cent over the last two calendar years. Brooke also runs a concentrated portfolio, tending to own around 45 stocks when the average in the sector is closer to the 70 mark.
Trojan Income is somewhat of an exception when compared with many of the funds mentioned in this article as it has not relied on small and mid-caps to boost returns over recent years; Style Research shows that more than 70 per cent of the portfolio is in mega and large-caps.
However, like all the managers at Troy Asset Management, Brooke runs his fund with a defensive tilt strongly in play. This means his portfolio is underweight oil & gas and has nothing in basic materials, helping it to dodge the worse parts of the market over recent years.
