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The funds hit the hardest from holding bombed-out housebuilders

28 July 2016

FE Trustnet pulls up the Investment Association funds that hold at least one of the major blue-chip UK housebuilders in their list of top 10 stocks and looks at how this has impacted their performances year-to-date.

By Lauren Mason,

Reporter, FE Trustnet

A total of 12 funds within the Investment Association hold at list one of the four UK blue-chip housebuilders within their top 10 holdings, according to research from FE Trustnet.

The likes of Artemis Capital, Cavendish UK Balanced Income and Old Mutual UK Mid Cap feature on the list and each one of the funds listed has underperformed both the FTSE 100 and FTSE All Share indices year-to-date.

In the run-up to the EU referendum, many investors took the decision to reduce or even sell their exposure to UK housebuilders, given the domestic-facing nature of the sector.

Sentiment took a further nosedive after the ‘remain’ majority result was announced, with the four FTSE 100 housebuilders falling between 20 and 30 per cent over the course of 24 hours.

Performance of stocks 24 hours after EU referendum

 

Source: FE Analytics

Since the referendum, housebuilding giants Barratt, Berkeley Group, Persimmon and Taylor Wimpey have all remained at equally lacklustre levels. The strongest performer out of the four, Berkeley Group, is currently down 22.53 per cent while the worst performer, Barratt, is down 29.82 per cent.

While it is fair to say the market area is now sorely unloved, there are indeed some more contrarian investors that are snapping up the stocks as a value purchase.

In an article published earlier this month, SWMC’s Brian Cullen told FE Trustnet that he started the year with a significant overweight to housebuilders and, since the EU referendum, he has more than doubled his exposure to the sector and has increased his weightings in Redrow, Taylor Wimpey Barratt and McCarthy & Stone.

“We had this debate internally, I have colleagues who are much more cynical and believe they are cyclical companies that have had a very good run which isn’t sustainable,” he said. “Whereas we were more confident going back three or four months was that the companies looked pretty cheap to us on either an asset basis or an earnings basis.”

Delving under the bonnet of the Investment Association universe, we take a look at the funds that hold at least one of the blue-chip housebuilders in their top 10 holdings and how this has impacted their performance year-to-date.

Out of these 12 funds, only one of them holds two of these stocks within their top 10. Old Mutual Equity 1, which has been headed up by FE Alpha Manager Richard Watts since 2010, holds both Barratt Developments and Taylor Wimpey in its top 10 holdings at 3.79 and 2.99 per cent of its portfolio respectively.

The £109m fund is down 3.33 per cent since the start of the year compared to its sector average’s return of 3.49 per cent, although over Watts’ tenure it is in the top quartile, having more than doubled its peer group average.

However, the fund is fairly small in size and is unavailable on most investment platforms.

Another fund on the list to have done well over the longer term but has been bruised by its housebuilder weighting is Montanaro UK Income, which has been managed by Charles Montanaro since 2012.

The four crown-rated fund invests predominantly in small and mid-cap companies, with more than a third of its holdings between £1bn and £2.5bn in size.

Taylor Wimpey is currently the £126m fund’s seventh-largest holding out of its 50-stock portfolio, accounting for 3.4 per cent of the AUM. Other large weightings in the portfolio include Big Yellow Group, Jupiter Fund Management and Hilton Food Group.

Since the start of 2016, Montanaro UK Income has lost 4.42 per cent compared to its sector average’s return of 3.21 per cent.

Performance of fund vs sector and benchmark in 2016

 

Source: FE Analytics


In his latest monthly commentary, the manager said: “It is no surprise that the weakest contributors in June were all negatively affected by the referendum result. Housebuilders Taylor Wimpey and Galliford Try declined following the Brexit vote on fears of an UK economic slowdown.”

Since Montanaro has been at the helm, the fund is in the top quartile for its total return of 58.24 per cent, having outperformed its average peer by 16.95 percentage points. However, it is in the bottom quartile for its annualised volatility and maximum drawdown (which measures the most potential money lost if bought and sold at the worst times) over the same time frame.

Two more funds within the Investment Association universe currently hold Taylor Wimpey in their list of top 10 stocks, one of which is Artemis Capital.

The £305m fund is managed by Philip Wolstencroft and has a 2.09 per cent weighting in the stock, which means it is the portfolio’s 10th largest weighting out of 92 holdings.

Since the start of the year, the fund has lost 3.72 per cent compared to its sector average’s return of 3.49 per cent and its FTSE All Share benchmark’s return of 8.14 per cent. The fund has also underperformed its average peer over one and three years as well as over the last one, three and six months.

That said, it has comfortably outperformed its sector average and benchmark over the manager’s tenure, albeit with a bottom-quartile annualised volatility and a higher-than-average maximum drawdown.

Performance of fund vs sector and benchmark under Wolstoncroft

 

Source: FE Analytics

The final fund to hold Taylor Wimpey is the four crown-rated Cavendish UK Balanced Income, which is headed up by Julian Lewis and has 2.3 per cent in the stock, making it its third-largest holding.

The fund, which also holds Galliford Try, is able to invest across the FTSE 350 index although a significant number of its largest weightings are smaller companies – these include the likes of Marston’s, New Look and Kier Group.

Year-to-date, the fund has returned 3.09 per cent which, while a strong performance compared to the aforementioned funds, is an underperformance compared to its IA Equity & Bond Income sector average and its FTSE All Share benchmark.

Since its launch, it has outperformed its sector average and benchmark by 14.41 and 11.04 percentage points respectively with a return of 77.71 per cent.

A total of seven funds within the Investment Association universe hold Berkeley Group within their top 10 list of stocks, although many of these (such as Mirabaud Equities UK High Income, Santander UK Growth Unit Trust and Saracen UK Income) are unavailable on most investment platforms or are too small in size to be on most investors’ radars.

Saracen UK Alpha (otherwise known as Saracen Growth), however, has Berkeley Group in its portfolio as its seventh-largest positioning at 4 per cent.

The fund has a concentrated portfolio of 31 stocks and has an active share of 95 per cent, which means that 95 per cent of its holdings differ from its FTSE All Share benchmark.

In his latest factsheet, manager Craig Yeaman admitted that June had been a challenging month for the fund, stating that negative share price movements “dwarfed” those of a positive tone.

“Four shares held in the fund fell by more than 20 per cent; these being Lloyds Banking Group and MJ Gleeson, both down 25 percent, Howden Joinery, off 24 per cent and Berkeley Group 23 per cent,” he said.


Year-to-date, the fund has lost 4.06 per cent compared to its sector average and benchmark’s returns of 3.49 and 8.72 per cent respectively.

Performance of fund vs sector and benchmark in 2016

 

Source: FE Analytics

However, the investment vehicle is still in the top quartile for its performance over the last three years, having outperformed its average peer by almost a third.

Another fund that holds Berkeley Group in its top 10 is Dimensional UK Small Companies, which is managed by the entire group at Dimensional and was launched in 2004.

The fund resides in the IA UK Smaller Companies sector and is benchmarked against the MSCI UK Small Cap index. Given that this is an area of the market that has been hit particularly hard year-to-date, it is no surprise that the fund has made a loss of 0.82 per cent so far in 2016.

However, this is a stronger performance than its average peer which has lost 3.59 per cent over the same time frame.

Performance of fund vs sector and benchmark in 2016

 

Source: FE Analytics

While not a single fund currently holds Persimmon in its top 10 holdings (this could be attributed to the fact that the stock has fallen so sharply), two funds still hold Barratt Developments in their top 10.

One of these is the aforementioned Old Mutual Equity 1 and the other is FE Alpha Manager Richard Watts’ Old Mutual UK Mid Cap fund.

The three crown-rated investment vehicle is just over £2bn in size and holds a concentrated portfolio of 43 stocks – Barratt Developments is its eighth-largest holding at 3.1 per cent.

Year-to-date, the fund has lost 3.93 per cent compared to its sector average’s return of 3.49 per cent and its FTSE 250 benchmark’s loss of 0.42 per cent.

Mid-caps have had a particularly torrid time over this period though and the fund is in the top quartile for its total returns over three, five and 10 years.

In terms of risk metrics, the fund is in the bottom quartile for its maximum drawdown and annualised volatility over Watts’ tenure.

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