The Standard Life Investments UK Equity Unconstrained fund was quickly becoming one of the most popular vehicles in the highly competitive IA UK All Companies sector under the management of Ed Legget. 
Its highly benchmark-agnostic and value-orientated approach meant the fund had delivered stellar returns both relative to the market and the peer group, with money flying into the strategy. Indeed, in 2013 the fund’s AUM more than doubled in size.
It is also easy to see why Legget (pictured) amassed such a following. While he was manager between April 2008 and June 2015, Standard Life Investments UK Equity Unconstrained was the second best performer in the peer group with gains of 212.25 per cent, beating the FTSE All Share by more than 150 percentage points in the process.
Performance of fund versus sector and index under Legget
Source: FE Analytics
Though it tended to struggle in more turbulent market conditions, its outperformance came in more risk-on conditions. FE data shows, for example, that the fund was a top decile performer in the 2009, 2010, 2012 and 2013.
However, when the AUM had surged to £1.3bn in June last year, the group announced that Legget was to step down from the fund and move to Artemis to take charge of the firm’s UK Select portfolio.
Though the initial news will have worried some unitholders, the fact that Standard Life Investments found an immediate replacement in Wesley McCoy – who actually launched the strategy and ran it two years before Legget – was seen as a very good move.
That being said, 11 months on since his appointment, it has been a difficult (re)start for McCoy.
Though it has certainly been a difficult period for equities in general, since McCoy has been manager the now £1bn fund has been a bottom decile performer with losses of 13.69 per cent. As a point of comparison, the FTSE All Share is down 5.9 per cent over that time.
Performance of fund versus sector and index since McCoy took charge again
Source: FE Analytics
As the graph shows, though the fund was caught out in the 2015’s volatility (largely due to its more cyclical exposure), its real relative underperformance has come in 2016 so far as McCoy’s bias towards mid and small-caps – which currently make up 55 per cent of the fund – has meant it has failed to bounce back as strongly as the market since February.
Of course a value tilt and bias outside of the FTSE 100 hasn’t been the best of strategies this year, but FE data also shows that Standard Life Investments UK Equity Unconstrained has also underperformed against Legget’s new Artemis UK Select fund since he took charge in January.
That being said, it is only by 2 percentage points and both funds are underperforming their sector and the index.
In his most recent note to investors, McCoy noted that his investment style has largely been out of favour recently.
“We will remain patient and monitor the companies we have invested in for stock-specific change, and will aim to avoid getting caught up in trying to predict some of the larger macro impacts on market sentiment at present,” McCoy said.
“We believe the returns from this approach will be adequate if we get it right but weaker periods of performance do make sure we push harder to make sure the companies we have invested in are right for our current approach.”
Like in any article like this, it must be noted that 11 to 12 months is a very short period of time to judge a fund or manager. Nevertheless, what should investors who stuck with the fund following Legget’s departure be doing now?
“A number of UK equity funds with strong long term track records have had a poor time in 2016, so I think Wes McCoy (and Ed Legget) have been unfortunate in the timing of taking on a new mandate rather than anything fundamental having gone wrong,” Richard Scott, fund manager at Hawksmoor, said.
“There has been a significant recovery in some sectors in which many active managers are lightly exposed (e.g. energy & other resources), while many mid-caps have struggled which is a favourite hunting ground for managers like McCoy and Legget.”
“I believe these managers are very talented, and I would back them over the long run to get performance back on track. While choppy market conditions may mean their styles struggle for a while longer, (so potential buyers could watch and wait), I think long term holders should sit tight.”
Certainly, McCoy had built up a good track record during his first stint as manager prior to him taking a break from fund management.
He launched the fund in September 2005 and ran it through to April 2008 over which time it was the best performing portfolio in the peer group and more than doubled the FTSE All Share with gains of 50.84 per cent.
Performance of fund versus sector and index under McCoy
Source: FE Analytics
However, that as still a relatively short period of time and (apart from towards the end of his tenure) a good period of UK equities.
Nevertheless, Rob Morgan – pensions and investment analyst at Charles Stanley Direct – says that if investors bought the fund because they liked its differentiated approach, there is no need to sell because of a change in manager.
“I think I would stick with it if I held. Standard Life has a team-based approach with proprietary screens that guide them to a so-called “winners list” of stocks, which has historically unearthed good opportunities,” Morgan said.
“Ultimately it is the fund manager that makes the final calls but as an investor you are very much backing the process as well as the individual. Having worked at Standard Life before (and generated strong returns) Wes McCoy is a safe pair of hands for the fund.”
“The process that Ed Leggett follows now he is at Artemis is broadly similar so it does not surprise me that the funds have performed in a similar fashion with the Artemis fund perhaps gaining an edge through the greater use of smaller companies.”
“Ultimately, exposure to economically sensitive, albeit “cheap” areas has damaged performance for both funds, and you could hold either for exposure for that part of the UK market.”
His thoughts are (partly) supported by Ben Willis, head of research at Whitechurch.
However, while he thinks both are good managers, he can fully understand why investors may wish to follow Legget to his new fund given his longer track record which has seen a variety of market conditions.
“[It’s a] tricky one really,” Willis said.
“McCoy used to run this fund initially before Leggett took over and did really well. Unluckily for him, Legget came in and did even better. The fund is high conviction, only holding c. 40 positions and so will be (and has been) volatile.”
“The fund’s current value tilt has worked against it but you can see the rationale of this approach. Will value outperform going forwards? That is the key question.”
“The fund process and philosophy remains the same and McCoy has only been back at the helm for just under a year and so it makes sense to give him some more time – especially if you invested when McCoy was originally the manager.”
“However, for those who have held the fund during Legget’s tenure then there is a real temptation to follow him to Artemis.”