There are five UK equity funds that are benchmarked against the FTSE 250 index and have achieved top-quartile total returns and risk-adjusted returns over five years and beaten their benchmarks but have fallen into the bottom quartile year-to-date, according to data from FE Analytics.
Additionally, there are a further five UK equity funds that are benchmarked against the FTSE All Share but have a notable bias towards mid-caps that boast the same criteria.
It’s no secret that FTSE 250 stocks have taken a beating this year, with the domestic-facing index down 2.46 per cent while the FTSE 100 is up 9.34 per cent so far in 2016.
Performance of indices in 2016
Source: FE Analytics
This divergence in performance became increasingly notable in the run-up to the EU referendum and widened further following the shock Leave majority vote.
As sterling depreciated, investors flocked to the global-facing stocks which give exposure to foreign currencies in order to cushion the blow of a weak pound.
Given that this has bolstered the performance of FTSE 100 stocks, some contrarian or long-term investors have been using this as an opportunity to buy attractively-valued positions further down the cap spectrum.
In an article published this week, FE Alpha Manager David Coombs told FE Trustnet that the referendum result opened up opportunities to buy investment vehicles and some individual holdings within the UK mid-cap space.
“What we ended up buying was the Brexit stocks that got hit even harder,” he said. “We thought we’d be buying the overseas earners and we ended up buying the domestic earners as they were so sold off. We weren’t massively aggressive with this though because clearly there is a lack of visibility.”
For those who are looking to adopt a similar investing technique, we have taken a look at the mid-cap and mid-cap orientated funds that have been hardest hit year-to-date but have delivered strong long-term total and risk-adjusted returns. Bearing in mind, of course, that past performance is no guide to future returns.
In terms of the funds that are benchmarked against the FTSE 250 index, the first on the list is Old Mutual UK Dynamic Equity. The four crown-rated fund was launched by FE Alpha Manager Luke Kerr in June 2009 and, over this time frame, it has returned 235.78 per cent, outperforming its sector average and benchmark by 124.41 and 51.97 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
While the £417m fund is in the top quartile for its total return and risk-adjusted return (as measured by its Sharpe ratio) over three and five years, it was particularly hard hit this year and has resided in the bottom quartile since 2016.
The 54-stock portfolio, which counts the likes of Paysafe Group, Just Eat and Card Factory as some of its largest holdings, is able to hold both long and short positions.
The next offering that is benchmarked against the FTSE 250 and fits the same aforementioned criteria is AXA Framlington UK Mid Cap, which is managed by FE Alpha Manager Chris St John and deputy managed by fellow FE Alpha Manager Nigel Thomas.
The £157m fund has 69 holdings including Right Move, Paddy Power Betfair and Autotrader. Again, while it is in the top quartile for its total and risk-adjusted returns over three and five years (and ahead of its benchmark over that time), it is in the third quartile for its return over one year and is in the bottom quartile over the last one, three and six months.
The fund is also able to hold small positions outside the FTSE 250 index and currently has 9.49 per cent in the FTSE 100, 3.95 per cent in UK small-caps and 3.28 per cent in AIM stocks as well as 3.13 per cent in cash.
Next up is Old Mutual UK Mid Cap, which has been headed up by FE Alpha Manager Richard Watts since the end of 2008. The three crown-rated fund is £2.2bn in size and aims to provide capital growth through a concentrated portfolio, which currently stands at 43 holdings.
The manager isn’t afraid to hold large weightings in stocks he has particularly high conviction in – for instance, his largest holding is currently Paysafe Group which accounts for 6.5 per cent of the portfolio.
While the fund is in the bottom quartile year-to-date as well as over one, three and six months, it has comfortably doubled its sector average’s total return over three, five and 10 years and has a top-quartile Sharpe ratio over these same time frames.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fourth fund on the list that is in the bottom quartile year-to-date but boasts top-quartile long-term returns and risk-adjusted returns is Allianz UK Mid Cap, which has three FE crowns and has been managed by Andrew Neville since 2004.
The fund is £51m in size and has a concentrated portfolio of 31 holdings including the likes of Just Eat, ASOS and Tullow Oil.
While it hasn’t fared so well over recent months, the fund has achieved top-quartile total returns over one, three, five and 10 years as well as top-quartile risk-adjusted returns over three, five and 10 years. However, it has performed in line with its benchmark over five years and has underperformed the index by 16.73 percentage points over the last decade with a total return of 136.18 per cent.
The final fund benchmarked against the FTSE 250 to feature in this criteria is Royal London UK Mid-Cap Growth, which is managed by Derek Mitchell and has an AUM of £331m.
The manager looks for stocks that offer strong growth prospects over a five-to-seven-year time frame – the fund’s top 10 holdings differ widely from the aforementioned funds and include Dechra Pharmaceuticals, water utility and waste management firm Pennon Group and insurance company Esure.
The stocks are selected with a strong valuation focus and are chosen for their ability to generate cash.
Royal London UK Mid-Cap Growth has achieved top-quartile total returns over five and 10 years (although it must be noted that Mitchell joined the helm in 2009) but has fallen into the top quartile over one year as well as over one, three and six months.
In terms of its Sharpe ratio, it is in the top quartile over five and 10 years and is in the second quartile over three years.
While not benchmarked against the FTSE 250, there are a number of other funds that fit into a similar pattern in terms of their long-term performances that are heavily biased towards UK mid-caps.
One of these is MFM Slater Growth, which is headed up by FE Alpha Manager Mark Slater and has significantly outperformed its sector average over three, five and 10 years. In fact, it is the second-top performer within the IA UK All Companies sector over the last decade.
The fund has also achieved a top-quartile Sharpe ratio over three, five and 10 years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
However, the five crown-rated fund has been hard-hit by the underperformance of domestic-facing stocks over the last year – the fund holds a number of housebuilders including Bellway, Galliford Try, Redrow and Barratt Developments, all of which have particularly suffered since the referendum.
Other UK equity funds with a mid-cap bias that have delivered strong long-term total returns and risk-adjusted returns but are in the bottom quartile in 2016 include MI Chelverton UK Equity Income, Unicorn UK Income, Marlborough Multi Cap Income and CFP SDL UK Buffettology.
