FE Trustnet has highlighted on a number of occasions how mass inflows can have an adverse effect on a manager’s flexibility and performance, but in some circumstances it is questionable why many funds get big in the first place.
Bestinvest’s Jason Hollands points out that many IMA funds get so large because they are backed by large-scale pension schemes and are often default options for investors who do not have the time or experience to build a portfolio themselves.
"There’s no question that a lot of these funds are pretty average," he said.
"The problem with many of them is that they’re very cautiously managed. The managers don’t want to stray too far away from the benchmark because of the mandates they are running, and so after charges many don’t stand up that well."
The onset of auto-enrolment, which will see billions of pounds of workers’ cash go in to the default option chosen by their pension scheme, could see such funds get even bigger in size.
According to inflows data from FE Analytics, the top-10 bestselling funds of the last year are dominated by three, four and five crown-rated portfolios.
The likes of First State Global Emerging Markets Leaders, M&G Global Dividend and Newton Asian Income – all sector leaders in recent years with highly rated management teams – have all taken more than £1bn in sales in the last 12 months alone.
However, there are a couple of funds on the list that have not stood out when it comes to relative performance.
The £2.9bn, one crown-rated Scottish Widows UK Growth fund is a good example.
It has almost doubled in size in the last year, in spite of its poor record versus both its benchmark and peer group.
The fund has fallen short of the FTSE All Share over one, three, five and 10 years, and is also a bottom-quartile performer in its IMA UK All Companies sector over each of these time-frames.
Halifax UK Growth is another. The £5.8bn fund – one of the largest in the entire UK All Companies sector, which has seen inflows of £1.6bn in the last 12 months – has also fallen short of the index over the four time periods.
It has a marginally better record than its Scottish Widows rival, putting it in the third quartile over one, three and five years.
It is still fourth quartile over 10 years, though.
Performance of funds vs sector and index over 10yrs
| Name | 1 yr (%) | 3 yrs (%) | 5 yrs (%) | 10 yrs (%) |
|---|---|---|---|---|
| Scottish Widows UK Growth | 23.3 | 29.16 | 12.08 | 97.57 |
| Halifax UK Growth | 24.08 | 35.87 | 22.15 | 109.49 |
| IMA UK All Companies | 26.07 | 42.8 | 29.99 | 145.02 |
| FTSE All Share | 25.43 | 45.74 | 31.83 | 156.03 |
Source: FE Analytics
With ongoing charges figures (OCFs) ranging between 1.51 and 1.61 per cent, the funds are averagely priced for their sector.
For investors who want to take charge of their pension, there are many funds out there with a proven track record and a top manager at the helm. Company pension schemes are still relatively restrictive when it comes to the funds on offer, but if you opt for a Self-Invested Personal Pension (SIPP) – the most popular option for FE Trustnet readers, according to our latest poll – then the possibilities are pretty much unlimited.
With this in mind, we highlight two UK equity portfolios that pack quite a punch for their relatively small size – one that focuses purely on growth and the other on growth and income.
Liontrust UK Growth
This £233m fund has seen a big change in fortunes since it was taken over by the duo of Julian Fosh and Anthony Cross back in March 2009.
It was relatively run of the mill before then, but the two FE Alpha Managers have transformed the performance of the fund, with returns of 125.09 per cent since taking charge.
Performance of fund vs sector and index since March 2009
Source: FE Analytics
The pair target companies that have an edge over their rivals, be it because of superior research capabilities or a better distribution network.
They like businesses with transparent, stable income streams, and so a sector such as pharmaceuticals is a favourite.
They invest in both large and mid cap companies, including FTSE 250 precision instrumentation supplier Spectris in their top-10.
While the managers’ style may be regarded by some people as defensive, the FE Research team points out that the fund is one that can outperform in both rising and falling markets.
"It will probably lag its peers in a sharp rally but it has the capacity to outperform in a market that rises sustainably over a long period," the team said.
The five crown-rated fund has an OCF of 1.68 per cent.
Evenlode Income
This £19.3m fund sits in the UK Equity Income sector, targeting both a healthy capital return and a rising level of income for investors.
The fund has delivered a very strong total return, which includes all dividends reinvested, since its launch in October 2009, meaning that it has outperformed both its IMA UK Equity Income sector average and FTSE All Share benchmark.
Performance of fund vs sector and index since launch
Source: FE Analytics
Manager Hugh Yarrow (pictured) believes that the mass printing of money by central banks – quantitative easing – will inevitably lead to inflation.
However, he believes the low-growth, high-unemployment environment means that deflation in the shorter term is still possible.
As a result, the manager is backing companies that invest in intangible assets with good pricing power, which he believes are insulated against both possible outcomes.
"They can sell things even if their prices go up – think PG Tips and Colgate, for example," he explained in a note to investors earlier this year.
"However, they also fare well in a deflationary period. They tend to offer resilient, repeat-purchase products, which people can’t do without."
"I don’t want to predict which way [inflation or deflation] goes. I’d rather insulate against it either way."
Yarrow can invest across the entire market cap space, although at the moment he says he sees the most value in large caps. Top-10 positions include Unilever, Imperial Tobacco and Diageo.
The fund has an OCF of 1.83 per cent. It is currently yielding 3.36 per cent.