There’s been a dramatic turnaround in the fortunes of IA UK All Companies funds over the past 12 months although a number of the sector’s members continue to consistently outperform their peers on a range of risk and return metrics.
For the first article of this annual series, we reviewed the performance of all IA UK All Companies funds across 10 metrics: cumulative five-year returns up to the end of 2018 as well as the individual returns of 2018, 2017 and 2016, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown, and upside and downside capture relative to the sector average.
We then worked out each fund’s average decile ranking for the 10 metrics to discover which were most consistently at the very top of their peers for this wide spread of risk and return measures.
One immediate point, however, is the significant fall in five-year returns since we carried out this study last year. Then, the average IA UK All Companies fund had made a five-year total return of 68.27 per cent and beaten the FTSE All Share; at the end of 2018, the five-year return had fallen to just 18.41 per cent and was the behind the index.
Performance of fund vs sector and index over 5yrs to end of 2018
Source: FE Analytics
But not every member of the sector has had a terrible time and the fund that comes in first place in this research is Liontrust Special Situations; it has an average decile ranking of 1.5 for the 10 metrics we examined. It was in third place in this research last year.
The £4.2bn fund has made a top-decile 53.50 per cent total return over the five years in question and is also in the first decile when it comes to performance in 2018, alpha, volatility, maximum drawdown, Sharpe ratio and downside capture.
It is headed up by the FE Alpha Manager duo of Anthony Cross and Julian Fosh, who use their proprietary Economic Advantage process when building the portfolio. This looks for companies with intangible assets such as desirable intellectual property, strong distribution channels and significant recurring business; top holdings include Diageo, Relx Group and GlaxoSmithKline.
Square Mile Investment Consulting & Research, which gives Liontrust Special Situations an ‘AA’ rating, said: “This is a very well-considered and defined investment process which steers the managers towards relatively steady businesses that are gradually growing and generating high levels of cash. Essentially, the team is looking for companies operating with a clear and unique competitive edge.”
In second place is MFM Bowland, which has an average decile ranking of 1.6 and has made the sector’s highest total return of the five years examined after gaining 97.37 per cent.
The £16m fund has been managed by Hargreave Hale’s Leon Shuall since March 2014 and has enjoyed a strong run since. In the three years before Shuall took over, for example, MFM Bowland was in the peer group’s bottom decile.
In the latest fund report, the manager said: “Since we took over management of the fund four years ago, the performance has become a little more consistent versus historic trends.
“We place an emphasis on the relative qualities of the companies we invest in and this has broadly helped with performance. The current asset allocation continues to remain relatively light in the more cyclically sensitive sectors and we continue to face relatively expensive valuations for the more dependable companies.”
Source: FE Analytics
In third place is FE Alpha Manager Keith Ashworth-Lord’s £588.7m CFP SDL UK Buffettology fund with its average decile ranking of 1.7 and a five-year return of 83.49 per cent. In last year’s research, this fund was at the top of the list.
Ashworth-Lord’s approach mirrors the long-term, value-orientated investment style of Warren Buffett and, in keeping with this, favours enduring franchises or well-established businesses that are household names or have a unique product, all coupled with good growth prospects. Top holdings at the moment include Games Workshop, A.G. Barr and Liontrust Asset Management.
The FE Invest team, which has the fund on its Approved List, said: “We have been impressed by the disciplined approach taken by the investment team. Keith Ashworth-Lord has strong investment disciplines and will stick to them.
“The patient, concentrated approach is one the managers share with some of the most successful of their peers in the UK and abroad and could suit investors looking for a genuinely active fund that can outperform the UK market.”
Of all the IA UK All Companies members with an average decile ranking of less than 3, the largest is FE Alpha Manager Nick Train’s LF Lindsell Train UK Equity fund. It has assets under management of £5.6bn and scored 2.2 in this research.
Train is known for his long-term approach that sees him hardly ever sell a holing or add new ones. He looks for durable, cash-generative business franchises and favours global consumer brands, leisure and media companies and retail banks; top holdings include Relx Group, Diageo and Unilever.
Other well-known funds sitting near the top of the table include the £4.2bn TB Evenlode Income fund with an average decile ranking of 1.8 and the £1.8bn Jupiter UK Special Situations fund, which scored 2.9.
Source: FE Analytics
The above table shows the IA UK All Companies funds that are in the sector’s bottom deciles for the 10 reward and risk metrics we reviewed in this research.
Jupiter UK Growth put in the worst showing with its average decile ranking of 9.1. The £983.3m fund is managed by Steve Davies and has an unconstrained mandate to invest in both traditional growth and out-of-favour stocks.
Square Mile gave the fund an ‘A’ rating and said: “It should be noted that the nature in which [Davies] manages this fund means that its performance profile can be quite volatile, particularly over shorter timeframes. Therefore, it may be better suited to longer term investors who are prepared to tolerate some shorter-term variability.”