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The top-rated UK funds being sold on Brexit fears

02 June 2016

FE Trustnet looks at some of the top-performing UK equity funds whose flows have been particularly hard hit by a change in investor sentiment due to concerns surrounding the impending EU referendum

By Lauren Mason,

Reporter, FE Trustnet

Invesco Perpetual High Income, AXA Framlington UK Select Opportunities and Neptune UK Mid Cap are among some of the highly-rated funds in the IA UK All Companies sector to have seen the biggest outflows over the last six months, according to data from FE Analytics.

Fears surrounding a potential Brexit have been well-documented over recent months, with many managers warning of the negative impact an exit from the EU could have on the British economy.

In an article published earlier this year, SWMC’s Brian Cullen, who runs the firm’s UK fund, warned that a Brexit could be hugely detrimental to the domestic market.

“It is a big risk. The one thing I wouldn’t agree with is the people who have said, ‘oh well, whichever way the vote goes it doesn’t really matter’,” he said.

Research from the Investment Association published yesterday also found that UK funds saw net outflows of £310m during April alone, which is the most recent time frame it holds data for.

Which well-known and top-performing UK funds have people been taking the most money out of over the last six months, and is this due to Brexit fears or more fundamental problems regarding the investment vehicle itself?

We take a look in the below list.

 

Invesco Perpetual High Income and Invesco Perpetual Income

Both managed by FE Alpha Manager Mark Barnett (pictured), these five crown-rated funds are some of the largest within the IA UK All Companies sector, with Invesco Perpetual High Income winning the title for largest overall fund at £11.6bn (Invesco Perpetual Income is in fourth place at £5.8bn).

Over the last six months, Invesco Perpetual High Income has seen outflows of £505.51m, which is 4.37 per cent of the fund’s original size, while Invesco Perpetual Income has experienced outflows of 345.98 per cent, which is 5.37 per cent of the fund’s original size.

Both funds have underperformed their average peer over the last six months, having lost 2.59 per cent and 3.26 per cent respectively compared to their peer group composite’s loss of 0.21 per cent.

While neither fund is benchmarked against an index, they have underperformed the FTSE All Share over the same time frame, which has made a total return of 0.13 per cent.

Performance of funds vs sector and index over 6 months

 

Source: FE Analytics

While their short-term performance has been somewhat lacklustre, the funds have achieved top-quartile total returns over three and five years and above-average total returns over the last year compared to their sector average.

“I don’t believe these outflows are specific to that fund,” Adam Laird at Hargreaves Lansdown said.


“I think it shows a general sense of concern when it comes to the UK at the moment. We’ve seen a lot of investors pulling out of the UK over the last couple of months and I suspect this is due to fears over the EU referendum that’s coming up.”

“Invesco Perpetual’s funds are some of the largest in the sector and we’ve seen in the Investment Association that there’s a large movement of money into more stable areas such as fixed income and absolute return.”

Invesco Perpetual High Income has a clean ongoing charges figure (OCF) of 0.92 per cent and yields 3.12 per cent while Invesco Perpetual Income has a clean OCF of 0.91 per cent and yields 3.07 per cent.

 

AXA Framlington UK Select Opportunities

Next up is FE Alpha Manager Nigel Thomas’s four crown-rated AXA Framlington UK Select Opportunities fund, which is £3.9bn in size and has seen outflows of £284.11m over the last six months – 6.73 per cent of its AUM.

“It’s a large and very liquid fund by and large. We’ve actually seen that continue to be one of the most popular funds with our clients,” Tilney Bestinvest’s managing director Jason Hollands said.

“I suspect that part of this is that you’re seeing outflows out of UK equities and some of that could be down to the diet of doom and gloom we’re getting over the Brexit vote, and as a big and popular fund that’s bearing some of the brunt.”

“I wouldn’t be concerned about it because the fund continues to perform very well: it’s outperformed over the last year, it seems to be very actively managed and this is not a benchmark-driven fund.”

The fund, which holds stocks across the cap spectrum and aims to buy into firms that can produce returns across all market conditions, has delivered a top-quartile total return over the last decade with a total return of 118.2 per cent compared to its peer group composite’s return of 70.97 per cent.

It has also outperformed its sector average over one, three and five years despite finding itself in the bottom quartile over the last six months.

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

In terms of its risk metrics, the fund has a lower-than average maximum drawdown – which indicates the most potential money lost if bought and sold at the worst possible times – as well as an above-average risk-adjusted return measured by its Sharpe ratio.

“It’s run on a high conviction basis and the problem is nothing more than some asset allocation switches going on,” Hollands added.

“It may also be that, behind the scenes, you have some large fund selectors who are simply allocating out of UK equities and that’s what is behind the outflows.”


AXA Framlington UK Select Opportunities has a clean OCF of 0.83 per cent and yields 2.32 per cent.

 

Neptune UK Mid Cap

FE Alpha Manager Mark Martin’s four crown-rated Neptune UK Mid Cap fund, which is £619m in size, has seen outflows of £93.53m over the last six months, which is 12.86 per cent of its original AUM.

The manager aims to provide growth through his ‘three silo’ approach to stock selection, which involves analysing economic recovery, structural growth and corporate turnarounds. This process leads to a concentrated portfolio of between 30 and 40 stocks.

As with the aforementioned funds, Neptune UK Mid Cap has delivered strong total returns over the longer term and is in the top quartile over five and 10 years (although it must be noted that Martin took to the helm of the fund in 2008).

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Over the last six months though, it has fallen into the third quartile with a total loss of 0.89 per cent compared to its average peer’s loss of 0.64 per cent.

Ryan Lightfoot-Brown, research analyst at FundCalibre, said: “In this environment, a flight to safety via lower risk investments such as UK and US government bonds, as well as other traditional safe haven assets like gold is not surprising. UK equity funds—and particularly UK small- and mid-cap funds, which are strongly linked to Britain's domestic economy—have had a turbulent first half of 2016.”

“It's a punchy fund whose alpha generation has attracted significant inflows in the past. However, given Mark's approach, it's important investors understand the fund will typically be more volatile than the FTSE 100.”

“What's more, Mark does have quite high domestic exposure, even within his mid-cap peers, holding various stocks that are highly leveraged to the UK economy and could be disproportionately hit by a Brexit.”

That said, the fund is on FundCalibre’s Elite List for the manager’s unique investing approach and its strong performance record.

Steve Lennon, investment manager at Parmenion, added: “We rate Neptune very highly and are actually using it in our new solution. Funds could have experienced outflows for any number of reasons from Brexit concerns to the outperformance from mid-caps over recent history.”

“Whilst taking profit is always sensible, it highlights the need for open dialogue with the manager and in depth due diligence. Some managers argue that mid and small-caps should be more insulated from Brexit as they are more domestically orientated than large-caps and therefore less prone to swings in the value of sterling.”

Neptune UK Mid Cap has a clean OCF of 0.82 per cent and yields 1.56 per cent.

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