Active managers will always go through periods of underperformance relative to the index and the wider market, it’s a fact of life.
First and foremost, investment styles and market areas fall in and out of favour throughout the cycle – but active managers are obviously prone to human error. Technical factors, certainly in the case of open-ended funds like redemptions, can also mean active portfolios struggle.
However, the degrees of underperformance will vary from fund to fund.
Therefore, following on from last week’s article where we looked at the UK funds that have seen the biggest of bounce backs over recent times, this time around we look at the five funds from the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors that were top quintile on a five-year view this time five years ago but now find themselves firmly in the bottom quintile over half a decade due to various factors.
This is almost certainly the highest profile fund on the list.
Tom Dobell’s M&G Recovery fund was the darling of the IA UK All Companies for most of this century. After all, having taken charge of the fund in March 2000, it beat the FTSE All Share in each of the following 10 calendar years thanks to his ‘deep value’ style and high weightings to commodities.
As such, this time five years ago it was top decile and had more than doubled the returns of the sector and index with gains of 51.64 per cent over five years. Money also poured into the fund as a result, with most hoping to catch some of M&G Recovery’s stellar past performance.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
However, as value has underperformed so this fund has slipped down the performance table.
With the likes of energy stocks and miners struggling and due to odd stock disappointment, the fund has posted bottom decile numbers in each of the last four years and underperformed against the index in every year since 2011. Therefore, it has now been the third worst performing member of the sector over five years having lost 0.77 per cent compared to a 35 per cent gain from the index.
Its AUM has also shrunk considerably as a result, with the once £8bn fund now weighing in at £3.4bn.
M&G Recovery isn’t (arguably) the biggest fall from grace in the sector, however.
This time five years Richard Penny’s L&G UK Alpha fund was the best performing portfolio in the peer group on a five-year view, having returned 115.33 per cent and therefore beaten the index by a whopping five times over.
Though it did fall harder than the UK market in 2008, it significantly outperformed in 2009 and 2010 due to its concentrated, value approach and preference for smaller companies.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
However, like M&G Recovery, the poor performance of value stocks has meant Penny’s fund has come unstuck. It now trails the index by 15 percentage points over five years with returns of 19 per cent, despite the fact it more than doubled the FTSE All Share in the rallying market of 2013.
Indeed, it has underperformed in four of the last five calendar years.
As you may be able to tell, there is a theme developing here.
Like to two aforementioned funds, FE Alpha Manager Mark Slater’s MFM Slater Recovery fund has a distinct value bias. That, along with its bias towards mid and small-caps, meant the fund had decent period between June 2006 and June 2011.
FE data shows, for example, it made 36.92 per cent putting it 16 percentage points ahead of the peer group average.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
Interestingly, it is now nearly 16 percentage points behind the peer group over the past five years. Unlike the other two funds, though, the five crown-rated MFM Slater Recovery fund has outperformed in three of the last five years (2013, 2014 and 2015).
While it did underperform by some margin in 2011 and 2012, the major reason it has made it onto this list is due to its performance year-to-date.
It was already underperforming by some margin going into last week, but the surprise Brexit vote (along with Slater’s high weighting to small-caps and more cyclical names) means the fund is down a hefty 18 per cent so far in 2016.
BlackRock UK Special Situations
BlackRock UK Special Situations is almost the forgotten hero of the IA UK All Companies sector.
Under the stewardship of Richard Plackett, the fund had amassed a significant following thanks to its stellar returns and multi-cap, blended approach. This time five years ago, it was a top decile performer over five years and had more than doubled the returns of the wider UK equity market.
That was because the fund had outperformed in four of the previous five calendar years.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
Fast forward to today and it is a very different story. Plackett, having taken a six month sabbatical in 2014, retired in 2015 leaving Roland Arnold and Luke Chappell to manage the portfolio.
Though the fund’s performance hasn’t been dreadful, its returns have reverted much more towards the average having failed to beat the sector in three of the past five calendar years. Its underperformance this year hasn’t helped, meaning it is now 10 percentage points behind the sector and index over five years.
The final fund on the list the only portfolio from the IA UK Smaller Companies sector to fall from the top quintile to the bottom quintile over five years.
According to FE data, Elaine Morgan’s Kames UK Smaller Companies fund had more than doubled the returns of its peer group average over the five years between June 2006 and June 2011.
The reason behind those returns boils down to Morgan’s ability to protect capital during the global financial crisis – the fund lost half as much as it’s sector in 2007 and outperformed by 123 percentage points in 2008.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
Its returns since then haven’t been dire, though it has slipped to the bottom quintile since June 2011. It has still made 45.12 per cent over that time, which is three percentage points behind the peer group average.
The fund, which is growth orientated and weighs in at £297m, beat the sector in rallying markets such as 2015 and 2013 but has struggled to repeat its downside protection track record of the crisis. Indeed, it significantly underperformed in 2011 and 2014 and it’s a similar story so far in 2016 with its losses of 14.25 per cent.