While the average IA UK All Companies fund has a poor record in beating the FTSE All over the long term, as revealed in an FE Trustnet study earlier this morning, this does not mean the sector lacks high-profile funds with a track record of outperforming the index time and time again. 
There are 60 rolling 10-year periods that span 1 April 1991 to 31 December 2015 when viewed on a quarterly basis. When we looked at them in detail, the average return of IA UK All Companies sector was lower than the FTSE All Share’s in 57 of these periods – a disappointing result when you consider that the IA UK Equity Income sector only lagged the index on 17 of these occasions.
Although the results highlight the power of compound interest over time and offer some backing to the argument that UK equity income funds should be the core of a portfolio, it must be kept in mind that the study only shows the outcome of the ‘average’ fund. When we looked a little deeper into the IA UK All Companies sector, we found that a number of funds had never underperformed the FTSE All Share over the rolling 10-year periods covered.
In the following article – and with the reminder that past performance is no guide to future returns – we reveal seven of the best known funds to achieve this feat along with a chart showing their rolling 10-year total returns. The order they appear depends on how well they have performed over the most recent decade, although all that appear here have achieved something that few of the rivals have.
Investec UK Special Situations
Source: FE Analytics
First up is Alastair Mundy's £979m Investec UK Special Situations fund, which has returned 89.81 per cent over the 10 years to the end of 2015, ranking it seventh on this list. Its average 10-year outperformance of the FTSE All Share over the duration of our study was 48.97 percentage points.
Performance has been weaker over recent, albeit shorter time frames – it’s ranked third quartile over five years and fourth quartile over three years – but it remains one of the few UK funds to have beaten the FTSE All Share over the long term time and time again.
Mundy is regarded as one of the best deep value managers in the business, but this style has struggled over recent years as investors have opted for quality names, especially as the market liquidity created by quantitative easing largely flowed into ‘bond proxies’ rather than recovery stories.
Square Mile Investment Consulting & Research, which gives the fund an ‘AA’ rating, highlights the long-term nature of the manager and says he is able to tune out the noise of the market and media: “Given the contrarian philosophy and long-term focus of the fund, investors should be aware that there may be times when its performance deviates substantially from the benchmark, particularly over short to medium time frames.”
HSBC is the top holding of the fund, accounting for 8.5 per cent of assets, with BP, GlaxoSmithKline, Royal Dutch Shell, Grafton Group and Royal Bank Of Scotland Group also appearing in its top 10. The largest sector bet is in financials at 24.6 per cent, followed by oil & gas and industrials.
Schroder Income
Source: FE Analytics
This £1.4bn fund, which is in sixth place over the most recent 10 years with a 95.36 per cent gain and has an average 10-year outperformance of the FTSE All Share of 54.75 percentage points, is another that takes a deep value approach to investing. While it did make one of the sector’s biggest losses in 2015, it is still in the IA UK All Companies’ second quartile on three and five-year views.
It is managed by Kevin Murphy and Nick Kirrage, who took over the portfolio in May 2010. Both are co-heads of Schroders’ UK value equity team although with this fund they have a mandate to provide a growing income stream for their investors; indeed, until relatively recently it was a member of IA UK Equity Income sector.
Again, the value approach means that a long-term view is needed as it can take time for the underlying companies’ fortunes to turn around and it can give a more volatile ride over the shorter term. Current holdings include GlaxoSmithKline, Aviva, BP, AstraZeneca and Royal Bank of Scotland.
With many investors looking at potential dividend cuts, Kirrage recently told FE Trustnet that it is just as important to look for companies that can grow payouts: “We're kind of in a place where it's time for dividend pickers. We talk about stock pickers but it is dividend pickers that investors need now.”
“I think people are obsessing about who is going to cut but I think a question that could be more important is who is going to come back. A big part of the dividend outlook will come from companies returning to the register. Income investors will want to be involved in these while avoiding those that will be cutting.”
BlackRock UK Special Situations
Source: FE Analytics
This £976.1m fund is up 100.43 per cent over the 10 years to the end of 2015 and its average 10-year outperformance of the FTSE All Share has been 84.75 percentage points. It is managed by Roland Arnold and Luke Chappell; Chappell joined the portfolio in July 2015 after Richard Plackett – who had been in charge since June 2004 – retired.
The fund focuses on small and mid-sized companies, which tend to be more exposed to the fortunes of the UK economy rather than growth on the global stage, although around 40 per cent of its assets are invested in large-caps. Accordingly, its top holding is Royal Dutch Shell, followed by HSBC, Relx, British American Tobacco and Bellway.
In a recent investor update, the managers said that the latest macroeconomic data from the UK and the US suggests a positive outlook on equities can be taken, although growth in both countries has slowed recently. One positive for UK investors is the pick-up in activity in Europe, although China’s slowdown remains a concern.
“Overall global GDP growth remains modest, but equity valuations continue to look attractive relative to other assets,” they added. “We continue to maintain an emphasis on high-quality, well-financed small and medium-sized companies that we believe are able to prosper in a relatively low-growth world.”
Franklin UK Rising Dividends
Source: FE Analytics
With a total return of 153.54 per cent, this £22.8m fund comes in fourth place on our list; the average 10-year outperformance of the FTSE All Share has been 32.96 percentage points. It has been run by Colin Morton since September 2000, with FE Alpha Manager Ben Russon and Mark Hall joining the portfolio as deputies in September 2013.
It’s important to note that the bulk of the fund’s track record was amassed under its previous Franklin UK Blue Chip guise, when it had the aim of building a portfolio of larger companies that offer both dividends and capital growth potential. The name and remit of the fund was changed in January 2015, giving the manager a greater focus on dividend growth – specifically those companies that have increased dividend payments in at least eight out of the last 10 years – and the ability to invest across the market cap spectrum.
At the time of the change, however, Morton said it would be likely that the portfolio would be steered towards the FTSE 100. This is the case today, with the portfolio’s largest holdings being the likes of Unilever, AstraZeneca, Smith & Nephew, National Grid and RELX.
In his most recent update, the manager said: “There is not much evidence of New Year optimism as we enter 2016 with markets resuming their downward trajectory following the late December squeeze higher. We might have realistically hoped that following two years of minimal progress that the equity market would have de-rated to a more attractive valuation. Instead we have endured two years of earnings disappointments and face a market more exposed than ever on valuation.”
Fidelity Special Situations
Source: FE Analytics
This £2.8bn fund, which has been managed by FE Alpha Manager Alex Wright since January 2014, needs little in the way of introduction, being one of the more closely watched products in the Investment Association universe. Over the past decade, it has made a 111.73 per cent total return and the average 10-year outperformance of the FTSE All Share is 140.18 percentage points.
Wright – like Anthony Bolton and Sanjeev Shah before him – focuses on businesses that have already gone through a sustained period of underperformance but he sees little downside remaining and the possibility of a strong recovery in share prices. Like other value funds, it has found market conditions against it since the financial crisis but did turn in top quartile returns in 2012, 2013 and 2015.
While the recent market sell-off has created a difficult environment for investors, the manager is one who has been using it to add to holdings: “This uncertainty has created some attractive contrarian opportunities in various sectors and market cap categories. We have been taking the opportunity to buy shares in companies whose prices have fallen and have attractive prospects for positive change over the medium term.”
Fidelity Special Situations’ largest position is in Lloyds Banking Group, followed by Citigroup, CRH, Royal Mail and Carnival. Its largest sector overweights are to industrials, financials and consumer services, while the portfolio is underweight consumer goods, utilities and telecommunications.
Schroder Recovery
Source: FE Analytics
This £726.7m fund is also run by Kirrage and Murphy alongside their Schroder Income fund. It made a 117.60 per cent total return in the 10 years to the end of 2015, while its average outperformance of the FTSE All Share over the 10-years periods has been 100.03 percentage points.
As its name suggests, this is another fund that has a recovery style. This means the fund has been hit hard in recent years, with its 13.41 per cent fall in 2015 making it the worst performer of the year.
However, it’s one of the funds that many analysts tip to have a strong turn around in performance if the style bias in the market reverses, thanks to its deep value, long-term approach to investing. Late last year, Chelsea Financial Services’ Darius McDermott told FE Trustnet that he was upping exposure to the fund because of its underperformance.
“After a period of underperformance that it is exactly the period to buy these sorts of managers. If you already own them, then stick with them and there is a strong argument to add to them, as hard as it is to do when they are having a difficult time,” McDermott said.
“With markets depressed we want to buy a fund that has a big beta to the recovery on the market. Even though these types of funds can have lumpy performance these are long-term holdings.”
Invesco Perpetual High Income
Source: FE Analytics
As one of the best known funds in the Investment Association universe, this £12.4bn fund will be familiar to most investors thanks to its track record in generating strong total returns and defending capital from the worst of the market falls. The total return over the most recent 10-year period has been 135.83 per cent while its average outperformance of the FTSE All Share over all the 10-years periods has been 108.32 percentage points.
The fund is managed by Mark Barnett, who was assigned to the portfolio in March 2014, but the bulk of its track record was built under UK equity income veteran Neil Woodford. However, both managers share a similar investment approach: a long-term and contrarian style that blends a top-bottom macro overview with bottom-up stock-picking.
This is another fund that was previously in the IA UK Equity Income sector but switched peer groups after failing to achieve the yield target demanded of UK equity income funds. Invesco Perpetual High Income is run with a total return approach and Barnett, like Woodford before him, does not want to be forced into holding companies just because their yield is high.
Barnett focuses on businesses offering visibility of revenues, profits and cash-flows, with an aim of delivering shareholder value through a sustainable and growing dividend – an approach which he thinks has the best chance of generating returns in the low-growth environment the global economy finds itself in.
The portfolio’s largest position is US tobacco company Reynolds American, followed by British American Tobacco, AstraZeneca, BT and Imperial Tobacco. The largest sector bet is to financials at 25.52 per cent of assets while he also has 18.70 per cent in healthcare and 17.34 per cent in consumer goods.