Our latest poll asked readers what is the absolute maximum they would pay for an active UK fund in terms of a clean ongoing charges figure (OCF) – and some 60 per cent of the 2,600-odd who responded said they would not invest in a fund charging more than 1 per cent. 
It is certainly understandable why so few would pay more than 100 basis points for active UK equity exposure, especially as charges can be the biggest determining factor for an investor’s potential return.
A recent FE Trustnet article also highlighted this point, as it showed that active UK funds with a cheaper OCF have tended to outperform their more expensive rivals.
That being said, our data also shows that there have been a number of exceptions to the rule and therefore various industry experts argue that charges shouldn’t be the make or break to an investment decision.
Nevertheless, by backing a cheaper fund investors do give themselves a better starting advantage of outperforming. Therefore, as part of our charges special on the website today, here we highlight five funds in the three main UK equity sectors that have achieved stellar long-term performances, have trusted managers at the helm, are highly regarded by our research team and charge significantly less than their sector average.
The average OCF in the IA UK All Companies and IA UK Equity Income sectors is 0.91 per cent while the average OCF for a fund in the IA UK Smaller Companies space is 1.12 per cent.
MFM Slater Growth – 0.8 per cent OCF
First up is MFM Slater growth, which is headed up by FE Alpha Manager and co-founder of Slater Investments Mark Slater.
The £359m fund has a portfolio of 55 holdings, all of which are chosen through a bottom-up stock selection process.
Slater uses the price to earnings growth (PEG) ratio as his primary valuation tool when choosing holdings. He also focuses on companies that have a strong cash flow, sustainable and above-average growth prospects and some form of competitive advantage such as a well-known brand name or a high market share.
This selection process has clearly worked for the manager as, since he launched the fund in 2005, it has provided a total return of 296.64 per cent, almost tripling its average peer in the IA UK All Companies sector and meaning it is the top-performer in its sector over the last decade.
Performance of fund vs sector since launch
Source: FE Analytics
While the five crown-rated fund has produced stellar returns though, it must be noted that it has a higher-than-average annualised volatility and maximum drawdown (the most an investor could have lost if they’d bought and sold at the worst possible times) over 10 years – which is understandable given Slater tends to focus on mid and small-caps.
However, it is in the top-quartile for these risk metrics over the last three and five years.
When delving into the fund’s performance on an annualised basis, it seems that the fund fared particularly badly compared to its peers during 2007 and the financial crash of 2008 which, compared to its top-percentile returns during 2010 and 2014, would attribute to its heightened volatility over the longer term.
JOHCM UK Opportunities - 0.81 per cent OCF
Another fund in the IA UK All Companies sector that has delivered particularly strong performance and has cheap ongoing charges is JOHCM UK Opportunities, though it is worth bearing in mind that it does charge a 15 per cent performance fee which can be a turn off for many investors.
It has been managed by FE Alpha Manager John Wood since its launch in 2005, who was then joined by deputy managers Rachel Reutter and Michael Ulrich in 2012 and 2015 respectively.
The £1.6bn fund has a highly-concentrated portfolio of just 24 holdings which can be chosen from across the cap spectrum, although the value-orientated fund currently has no small-caps and holds just 13.8 per cent in mid-caps.
At the moment, the fund holds a high cash weighting at 19.3 per cent, which Woods attributes to following Warren Buffett’s famous mantra: “Rule one: never lose money. Rule two: never forget rule one.”
In his latest report, he explains that investor behaviour is corrupting markets in the same way it did during the dot com crash and the financial crisis, pointing out that he has recently encountered companies who have tried to move their ‘executive remuneration’ goal-posts and therefore applied distortive behaviour to achieve personal gain.
“Discovering management teams who will act as sensible long-term custodians of capital is challenging in an environment of warped investor behaviours,” Woods said.
Despite this hefty cash weighting, the fund has still outperformed its peer group composite over the last one, three and six months, as well as over the last three, five and 10 years.
Its strongest outperformance is over the longer term, having more than doubled the total return of its IA UK All Companies sector average over the last decade.
Royal London UK Equity Income – 0.66 per cent OCF
Over in the equity income space we have Royal London UK Equity Income, which has four FE crowns and has been run by Martin Cholwill since 2005.
The £1.7bn fund is able to invest across the cap spectrum but often holds very few stocks within the small-cap space and will hold around a 50 per cent weighting in blue-chips – its largest holdings include the likes of Shell, GlaxoSmithKline, AstraZeneca and Aviva.
While the fund can sometimes appear similar to the index, the weightings in each position are based entirely on Cholwill’s conviction. These stocks are chosen with a long-term investment view and are often bought during moments of temporary share price blips.
The fund has delivered a consistently strong performance over the manager’s tenure, providing above-average returns over one, three five and 10 years.
As with the aforementioned fund, its strongest performance is over the last decade, having provided a top-decile total return of 106.56 per cent and outperforming its sector average and benchmark by 45.18 and 49.21 percentage points respectively.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
It is also in the top decile for its Sharpe ratio (risk-adjusted returns) over the same time frame, although it has an above-average annualised volatility and maximum drawdown, suggesting that it may not be suitable for investors with little risk appetite.
Royal London UK Equity Income currently yields 4.31 per cent.
Threadneedle UK Equity Income – 0.82 per cent
Another fund in the IA UK Equity Income sector to achieve a top performance and have a low ongoing charges figure is Threadneedle UK Equity Income.
The £3.2bn fund is benchmarked against the FTSE All Share but often leans towards holding blue-chips – its list of top 10 largest holdings includes the likes of Imperial Brands, BT, GlaxoSmithKline and AstraZeneca.
The fund has been headed up by Richard Colwell since 2010 and, over this time frame, it has provided a total return of 91.55 per cent, outperforming its sector average and benchmark by 23.21 and 40.86 percentage points respectively.
In terms of its risk metrics, Threadneedle UK Equity Income has achieved a top-quartile Sharpe ratio and an above-average annualised volatility and maximum drawdown over the same time frame.
Colwell focuses on out-of-favour companies when choosing his holdings, which allows him to find attractively-valued opportunities while remaining differentiated from his peers. This strategy also helps the manager in terms of yield.
Nevertheless, because of the fund’s total return approach, he is also happy to hold stocks that pay little-to-no dividends so long as he can counteract this with higher-paying stocks – the fund currently yields 4 per cent.
“Colwell’s approach to equity income investing is unusual, and differentiates this fund from peers. This is a useful feature in a sector with many similar strategies,” the FE Research team said.
Old Mutual UK Smaller Companies Focus – 0.84 per cent
Moving over to the IA UK Smaller Companies sector, Old Mutual UK Smaller Companies Focus is also an attractively-valued top-performing fund.
The five crown-rated fund is run by former deputy manager of the fund Nick Williamson, who took over the helm of the fund at the start of the year after FE Alpha Manager Daniel Nickols decided to take a step back from running the vehicle.
The investment process remains largely unchanged and Williamson will buy into stocks that are no bigger than the largest company within the Numis Smaller Companies index upon purchase. Some of his highest-conviction holdings include Paysafe Group, Fever-Tree Drinks, Card Factory and Just Eat.
Year-to-date the fund is largely in-line with its sector average, outperforming it by 60 basis points. While it has underperformed its benchmark by 1.88 percentage points, it must be noted that the manager adopts a long-term time frame. A change in management is also more than likely to create some initial fluctuations in performance over the first few months.
Performance of fund vs sector and benchmark under Williamson
Source: FE Analytics
Over the longer term, the fund has comfortably outperformed its sector average and benchmark over one, three, five and 10 years, finding itself fifth in the sector for its total return over the last decade. While its risk-adjusted return over this time frame is in the top decile and its maximum drawdown is below-average, it has an above-average annualised volatility following tough periods in 2009 and 2011.
