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The funds that made sector-topping returns without relying on the FTSE All Share

28 November 2016

FE Trustnet looks at the UK equity funds that have achieved the highest and most uncorrelated returns versus the index over five years.

By Lauren Mason,

Senior reporter, FE Trustnet

Out of 243 UK equity funds with a five-year track record, 25 have achieved top-quintile total returns over the time frame while also boasting the lowest r-squared ratio relative to the FTSE All Share index, according to research from FE Trustnet.

FE Trustnet has taken all of the UK equity funds in the IA UK All Companies sectors that have achieved a top-quintile return over five years versus the FTSE All Share index to the end of October 2016.

We then filtered for the 20 per cent of funds with the lowest r-squared ratio, which measures how much of a fund’s performance is related to an index’s movements. While a perfect tracker would have an r-squared ratio of 100, which means 100 per cent of its returns are due to benchmark movements, active funds that are highly differentiated should have a score that is much lower.

Unsurprisingly, a total of eight out of the 25 funds on the final list have a mid-cap bias, as a majority of the FTSE All Share index consists of FTSE 100 stocks.

Out of these mid-cap offerings, the fund with the lowest r-squared ratio versus the index is FE Alpha Manager Mark Martin’s four crown-rated Neptune UK Mid Cap fund, which is £609m in size and has a concentrated portfolio of 36 stocks.

The fund has an r-squared ratio of 0.28 versus the FTSE All Share and, as to be expected, it has a higher ratio of 0.8 versus its FTSE 250 (ex IT) benchmark.

Over the last five years to the end of October 2016, it has returned 128.26 per cent, placing it in the top quintile versus its peers.

Performance of fund vs sector, benchmark and index over 5yrs to end of Oct 2016

 

Source: FE Analytics

Over the same time frame, it also boasts the third-highest alpha generation, which measures the additional returns made – in this case – relative to the FTSE All Share, over the same time frame at 12.09.

Martin’s fund has an active share (which measures how different a portfolio is to its benchmark) of 95.8 per cent. Its largest holdings include the likes of Devro, Paypoint and De La Rue which, combined, account for 24.3 per cent of the portfolio.

Other mid-cap funds that have made it onto the list for their strong five-year returns and their low r-squared ratios include Threadneedle UK Mid 250, Old Mutual UK Mid Cap and AXA Framlington UK Mid Cap.


As shown on the below table though, there are number of multi-cap funds who have also managed to achieve strong returns without relying on the FTSE All Share’s general movements.

 

Source: FE Analytics

The UK fund with the lowest r-squared ratio over five years to the end of October 2016 is MFM Slater Growth, which is overweight small- and mid-caps versus its peers in the sector but will also hold large-caps.

Its ratio is just 0.19 versus the FTSE All Share and 0.46 versus its IA UK All Companies sector average, which it is benchmarked against.


The five crown-rated fund is headed up by FE Alpha Manager Mark Slater and has a portfolio of 52 holdings. In line with sector guidelines, it is able to hold up to 20 per cent in non-UK equities and has Walt Disney in its list of top 10 holdings at 3.29 per cent. Its largest individual weighting is Hong Kong-based Hutchison China MediTech at 5.58 per cent, followed by the AIM-listed data company First Derivatives at 4.44 per cent and FTSE 250-listed firm Paysafe Group at 4.06 per cent.

Over five years to the end of October 2016, it has outperformed its sector average by 26.2 percentage points with a total return of 86.73 per cent. Over the same time frame, it has outperformed the FTSE All Share by 29.34 percentage points and has an alpha ratio of 8.66.

Following hot on the heels of MFM Slater Growth with an r-squared ratio of 0.21 is Unicorn UK Growth which has achieved exactly the same total return over five years to the end of October 2016.

Performance of fund vs sector vs sector and index over 5yrs to end of Oct 2016

 

Source: FE Analytics

The £17m fund has been managed by FE Alpha Manager Fraser Mackersie since 2011 and again, although it is able to invest across the cap spectrum, it tends to have a bias towards smaller companies and has First Derivatives, Clipper Logistics and Dotdigital Group as its three largest holdings within its 48-stock portfolio.

Its r-squared ratio compared to its sector average, which it is also benchmarked against, is 0.44 and, versus the FTSE All Share, it has an alpha ratio of 8.38.

Aside from mid-cap funds and funds with a marked bias towards smaller stocks, a number of vehicles on the list have a focus on value or recovery stocks.

Out of these, the fund with the lowest r-squared ratio is Standard Life Investments UK Equity Unconstrained which, although overweight mid-caps versus the FTSE All Share, invests across the cap spectrum and holds the likes of BT, Sage and Prudential in its top 10 holdings.

While not strictly a value fund, the manager adopts Standard Life’s ‘Focus on Change’ investment philosophy, which involves looking for companies that have been inefficiently priced by markets or are undergoing material changes.


The fund, which has an r-squared ratio of 0.39 versus the FTSE All Share over five years to the end of October 2016, has outperformed the index by 29.17 percentage points over the same time frame with a total return of 86.56 per cent. It has outperformed its sector average benchmark by 26.03 per cent.

Performance of fund vs sector and index over 5yrs to the end of Oct 2016

 

Source: FE Analytics

However, it must be noted that manager Wesley McCoy took a hiatus from running the fund between April 2008 and June 2015, over which time it was managed by Ed Legget.

Compared to its benchmark, the £808m fund has an r-squared ratio of 0.72.

Other funds with a slant towards value that have made it onto the list include L&G UK Special Situations Trust, SVM UK Opportunities and Cavendish Opportunities

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.