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"The FTSE’s going nowhere" – so these are the funds Ian Rees is backing to beat it

09 April 2015

The manager of the £574m Premier Multi-Asset Distribution portfolio is targeting high conviction managers with an unconstrained mandate, as well as those who invest in dividend-paying companies.

By Joshua Ausden,

Head of FE Trustnet Content

The UK equity market is likely to remain relatively flat on a five to 10-year view, according to Premier’s Ian Rees, who thinks investors must continue to target active managers who have the freedom to go significantly off-benchmark.

Rees, who co-manages 12 multi-asset portfolios including the £574m Premier Multi-Asset Distribution fund, thinks that steep valuations and meagre earnings growth present a challenging backdrop for UK companies, even though the economy is going from strength to strength. 

“Looking now over the next five to 10 years, I think it could well be that we see indices like the FTSE offer quite volatile returns but stay relatively flat overall,” he said.

“Given the recovery we’ve had and where valuations are, I think it’s difficult to make the case that equities are massively cheap. If the markets are to carry on rising it’s going to have to come from earnings growth, and that doesn’t look likely. The figures we’re seeing don’t suggest earnings are going to be particularly strong and as a result I think returns will be muted.”

Rees (pictured) says he and co-managers David Hambidge and Simon Evan-Cook are eyeing up high-conviction managers that have the best chance of outperforming a sideways index.

“I would have to say I still agree with what Richard Buxton was saying back in 2002 when he launched the Schroder UK Alpha Plus fund,” he explained.

“He said that he expected the FTSE to be relatively flat over the next decade and launched an unconstrained UK equity fund that had a chance of offering decent returns as a result. He has been proven right – we’ve just hit the all-time high but it’s taken a long time.”

“I’m looking for unconstrained UK funds that aren’t hamstrung by an index. An approach such as Buxton’s has a chance of beating the index. I think you once again want to be in a high conviction portfolio rather than a passive one.”

Interestingly, Buxton has since changed his opinion, telling FE Trustnet on numerous occasions over the past 18 months that he believes UK equities are set for a sustained period of strong performance. That hasn’t stopped Rees retaining a cautious stance, however.

According to FE data, the FTSE 100 has returned 53.28 per cent from a capital growth point of view since Buxton launched the Schroder UK Alpha Plus fund in June 2002. This puts it only slightly ahead of cash and inflation.

Performance of indices since June 2002

 

Source: FE Analytics

The picture is more positive with dividends reinvested however; our data shows the index has posted a total return of 142.7 per cent over the period.

Rees is using two types of UK fund to beat a flat FTSE 100. As mentioned already, he is looking far and wide for high-conviction managers with a proven record of adding value, targeting those with the freedom to ignore their benchmarks.

He rates Buxton highly as a manager, though doesn’t currently hold him across his portfolio of funds. Like his old venture, the £2bn Old Mutual UK Alpha fund looks to maximise capital growth by investing predominantly in large cap companies. The manager has high-conviction positions in financials, including Friends Life, Barclays, Lloyds, L&G and Prudential, in his top-10.


Buxton is one of the few managers to significant outperform the FTSE All Share over the past decade without having significant holdings in small and mid-caps. This is one of the reasons Square Mile rates him so highly.

Performance of manager and index over 10yrs

 

Source: FE Analytics

“The focus on larger capitalisation companies differentiates it from many other UK equity funds, a number of which have relied upon the recent strength of smaller and medium-sized companies to outperform,” the investment consultancy and research firm said.

“The manager’s approach is far-sighted and it can take time for his ideas to be rewarded. It should be noted that the approach can lead to greater volatility than other UK equity strategies and the fund's performance may accentuate any sharp market moves, both on the upside and the downside.

Rees says he prefers using another high-conviction manager, who uses a deep value approach to find unloved companies poised for a rebound.

“One manager that we have been backing for a few years is Henry Dixon, who runs the GLG Undervalued Asset fund. We backed him when he ran the same strategy at Matterley,” he said.

“He has a value discipline, which leads him to unloved companies that aren’t big constituents of the index. His style means he recycles his ideas frequently, giving him the opportunity to outperform significantly. He’s nimble enough to take advantages in small and mid-caps as well.”

Dixon had an excellent track record running the FP Matterley Undervalued Assets fund, leading it to top-decile returns in the UK All Companies sector between August 2008 and December 2014. His GLG Undervalued Assets fund has made a bright start since it was launched back in November 2013, significantly outperforming both its benchmark and sector average with returns of almost 18 per cent.

Performance of fund, sector and index since launch

 

Source: FE Analytics

GLG Undervalued Assets is Rees’ largest UK holding in the Premier Multi-Asset Growth & Income fund, accounting for 4.5 per cent of assets. Among Dixon’s biggest holdings at the moment are Lloyds, Galliford Try and Taylor Wimpey.

Rees is backing another deep value manager across his range: Alastair Mundy. His Investec UK Special Situations fund again pays little attention to its FTSE All Share benchmark, with the manager only allocating money to cheap companies with the potential to re-rate. His cautious stance has led him to build up almost 12 per cent in cash in recent months.


As well as backing high conviction growth managers, Rees is a big fan of equity income. He says the compounding effects of income are a very efficient way of outperforming a flat market, reflected by the big boost dividends have given to the FTSE 100 since 2002.

“UK equity income funds have a discipline which helps returns over time. Dividends not only help to compound returns, but the approach also gives funds a subtle value bias. In effect, it encourages managers to buy cheaper stocks,” he explained.

Among his favourite IA UK Equity Income funds are Franklin UK Equity IncomeEvenlode Income and Schroder Income, which feature prominently across his portfolios. All are either first or second quartile over one, three and five-year periods. Schroder Income, which unusually combines an income and deep value-style approach, is among the best-performers in the sector over the past decade.

Performance of fund and index over 10yrs

 

Source: FE Analytics

Rees says high conviction UK growth managers and disciplined UK equity income managers are best used together to beat a flat index, as they tend to perform better in certain markets – thus smoothing the journey for investors.

“UK equity income tends to be a little less volatile and perform better in down markets, whereas a UK all companies fund often does better when markets are rising,” he said.

One other high conviction manager who’s gaining increasing interest from fund selectors is Steve Davies, who runs Jupiter Undervalued Assets and UK Growth. Both are highly concentrated portfolios, with more than 50 per cent of assets in the top-10 alone.

Davies was only yesterday promoted to sole manager of the £1.4bn UK Growth fund, with former lead Ian McVeigh taking on the new head of governance role at the group.

Davies isn’t quite as pessimistic as Rees when it comes to the outlook for UK markets, but does think the ability to generate alpha will be more important over the next three years compared to the last.

“It’s very different now compared to 2012 when the whole market was extremely cheap,” he said. “It’s been less about stock selection and more about having beta.”


 “There is now much more of a skew to certain sectors. I think there is a lot of value in banks whereas some consumer staples are under real pressure. This suggests that outperformance will now diverge more away from the index – the key is making sure we are on the right side of it.”

“There is now much more alpha potential and clearly less beta potential.”

Like Buxton, Davies is bullish on UK banks, believing Lloyds’ share price could gain another 50 per cent on a one to two-year basis. Undervalued Assets has 7.55 per cent in the company – more than any other fund in the UK All Companies sector. Dixons, TalkTalk and ITV are also big off-benchmark positions.

Performance of fund, sector and index since Jan 2012

 

Source: FE Analytics

His Undervalued fund, which is set to be merged with UK Growth subject to approval, has been a star performer since Davies took it over in January 2012, generating top-decile returns of almost 80 per cent.

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