CF Lindsell Train UK Equity, Old Mutual UK Mid Cap and Standard Life Investments UK Equity Income Unconstrained are among the funds that have captured most of the UK market’s upside in the years since the financial crisis, figures from FE Analytics show, which may prove attractive to those expecting further rallies in equities.
The opening weeks of 2016 proved to be turbulent ones for equity investors, with many global indices trending downwards before rebounding from mid-February to now. The FTSE All Share, for example, was down 11.37 per cent in total return terms on 21 February but has rallied 12.16 per cent since to trade just below where it started the year.
This trend was broadly seen across other major indices to varying degrees, owing to factors such as signs of stabilisation in China’s economy and improving investor confidence. While the Nikkei 225 has fallen 1.49 per cent year to date, the S&P 500 has gone on to make a 4.09 per cent total return while the MSCI Emerging Markets index is up 3.32 per cent.
While there are potential risks on the horizon – especially for UK investors with the looming in/out referendum on the country’s European Union membership – many investment commentators maintain that equities remain the most attractive area of the market.
With this in mind, we looked at the IA UK All Companies and IA UK Equity Income sectors to see which FE Alpha Managers have the highest upside capture ratio against the FTSE All Share over the eight years since the financial crisis.
The upside capture ratio indicates a fund’s performance in an up market relative to the benchmark. A ratio of greater than 100 per cent means that during periods when the market is up, the fund did even better on average; the higher the up capture, the better.
Source: FE Analytics
The above table shows the FE Alpha Manager-headed IA UK All Companies funds that have an upside capture ratio of more than 110 per cent as well as sitting in the peer group’s top quartile over the past eight years.
As can be seen (which might not be entirely surprising given the strong run in that part of the market), two mid-cap funds top the list.
Of course, these numbers were generated against the FTSE All Share. However when they are rerun against the FTSE 250, both funds have still delivered an upside capture in excess of 110 per cent: for Old Mutual UK Mid Cap’s is 118.03 per cent while Franklin UK Mid Cap’s is 115 per cent.
The main driver of Old Mutual UK Mid Cap’s returns has been the stock selectin of manager Richard Watts, although he also takes into consideration the macroeconomic environment when building the portfolio. The FE Research team says this blending of stock selection and economic analysis helps to shorten any periods of underperformance.
Paul Spencer’s Franklin UK Mid Cap fund focuses on higher quality companies, which have performed well in the aftermath of the global financial crisis thanks to investor aversion to riskier parts of the market. While the fund has performed strong in rising markets, Square Mile highlights that it has a focus on capital preservation as well.
Both funds also stack up when it comes to the total returns made over the period, with the Old Mutual portfolio ranking sixth in the sector over eight years while the Franklin offering is in eighth. Their performance has also been strong over three and five years with first quartile returns being seen from both portfolios.
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
The strongest performer on the list, however, is Nick Train’s CF Lindsell Train UK Equity with its 191.86 per cent gain. The fund has been a consistent outperformer and recently came out on top in FE Trustnet’s UK funds that tick (just about) all the boxes you can think of study.
Train also focuses on quality businesses, which has bolstered returns since the crisis, and counts RELX Group, Unilever, Diageo, Sage and Hargreaves Lansdown as top holdings in its very concentrated portfolio. The fund has a very strong track record in other areas, sitting in the sector’s top quartile for maximum drawdown, annualised volatility and Sharpe ratio.
Other funds that seem to have made the most of the market’s post-financial crisis rally include James de Uphaugh, Chris Field, Matthew Smith and Chris Reid’s Majedie UK Focus, Margaret Lawson and Colin McLean’s SVM UK Growth and Jamie Seaton’s GVQ UK Focus.
In addition to posting upside capture ratios of more than 110 per cent, they have made total returns of more than 110 per cent as well.
When it comes to the IA UK Equity Income sector, only FE Alpha Manager-headed fund is in the top quartile for upside capture and total returns over the past eight years: Standard Life Investments UK Equity Income Unconstrained, which is run by Thomas Moore.
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
The fund’s upside capture ratio over the FTSE All Share has been 139.94 per cent. This compares to a sector average of just 82.84 per cent – meaning the average UK equity income fund has made less than the index in rising markets – and makes it the highest performing member of the peer group on this metric.
Moore’s focus on dividends when analysing companies, with the aim of forecasting the future dividend flow, and has a tendency to own more mid-cap stocks that his average peer, which has aided returns in recent years.
