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The funds UK equity bulls should have on their radar

07 October 2016

Following an article yesterday, FE Trustnet looks through the equity funds tipped by industry commentators for investors wanting to increase their UK exposure.

By Lauren Mason,

Senior reporter, FE Trustnet

Evenlode Income, Lowland Investment Company and JOHCM UK Opportunities are among some of the UK equity funds that investment professionals think look particularly attractive at the moment.

In an article published yesterday, FE Trustnet asked a number of industry commentators whether they think investors should continue buying into the UK despite the FTSE 100 index heading past the 7,000 mark for the first time in more than a year.

Performance of index in 2016

 

Source: FE Analytics

The general consensus was that there are many positive economic fundamentals in the UK and it is therefore an attractive area for investors, although most warned that they need to be selective when buying into the market.

“While UK stock market indices may be at, or near, historic highs, that does not necessarily mean UK stocks are expensive,” Hargreaves Lansdown’s Laith Khalaf pointed out.

“If you compare share prices to company earnings, the valuation of the UK stock market is actually somewhere in the middle of its historic range, neither particularly cheap, nor dear, at current prices.”

In the below article, we take a closer look at the UK equity funds the experts are backing for those who believe the market has further to run.

 

Evenlode Income

First up is the five FE Crown-rated Evenlode Income fund, which was launched by Hugh Yarrow in 2009.

The £1bn fund recently moved into the IA UK All Companies sector but is benchmarked against the IA UK Equity Income sector. Since inception, it has outperformed the two peer groups by 65.35 and 59.85 percentage points respectively.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

The fund, which was highlighted by Tilney Bestinvest’s Jason Hollands, has an emphasis on sustainable real dividend growth and, as such, has a low portfolio turnover and long-term holding periods. The manager also looks for stocks with both high returns on capital and strong free cash flow – examples of the fund’s largest holdings include Diageo, Unilever and Sage Group.

The fund is also highly-concentrated, with its top 10 holdings accounting for 68.2 per cent of the 40-stock portfolio.

In terms of its risk metrics, the fund is in the top quartile for its annualised volatility, Sharpe ratio (which measures risk-adjusted returns), maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times) and downside risk (which predicts the fund’s ability to fall in price during down markets) since its launch.

Evenlode Income has a clean ongoing charges figure (OCF) of 0.95 per cent and yields 3.3 per cent.


JOHCM UK Opportunities

Also backed by Hollands, JOHCM UK Opportunities has five FE crowns and was launched by FE Alpha Manager John Wood in 2005.

The £1.8bn fund has a concentrated portfolio of 26 stocks, which are chosen for their robust balance sheets as well as their ability to generate predictable and growing cash flows. The fund’s largest weightings are in Shell, National Grid, British American Tobacco and Centrica.

Another important part of the manager’s process is his sell discipline. Wood will leave meeting individual companies to his colleagues so he doesn’t become too attached to company management on a personal level and can therefore take more of an objective approach to selling. 

Over the last decade, the fund has returned 136.92 per cent compared to its sector average’s return of 77.18 per cent and its benchmark’s return of 77.38 per cent. It is also in the top quartile for its annualised volatility, maximum drawdown, maximum loss and Sharpe ratio over the same time frame.

JO Hambro UK Opportunities has a clean OCF of 0.81 per cent and yields 2.79 per cent.

 

Lowland Investment Company

Neil Jones, investment manager at Hargreave Hale, particularly likes James Henderson’s Lowland Investment Company in terms of gaining exposure to the UK market.

“I continue to think there are good opportunities in investment trusts because there are still discounts there despite markets having risen, which means it is good to add exposure that way,” he told FE Trustnet yesterday.

Lowland Investment Company, which is currently trading on a 9.2 per cent discount, aims to provide both growth and income through a blend of stocks ranging across the cap spectrum; the trust is able to hold up to 50 per cent of its portfolio in FTSE 100 stocks. Currently, it has Royal Dutch Shell, insurance company Hiscox, HSBC and engineering solutions provider Senior as some of its largest holdings.

Over the last decade, the trust has returned 105.63 per cent, outperforming its sector average and benchmark by 43.04 and 28.25 percentage points respectively.

Performance of trust vs sector and benchmark over 10yrs

 

Source: FE Analytics

Over this time frame though, it is in the bottom quartile for its annualised volatility, downside risk and maximum drawdown, due to significant bouts of annualised underperformance during 2008 and 2014.

Lowland Investment Company has an ongoing charge including a performance fee of 0.87 per cent and yields 3.3 per cent. It is currently 5 per cent geared.


Liontrust Special Situations

The final fund on the list is Liontrust Special Situations, which is run by FE Alpha Manager duo Anthony Cross and Julian Fosh.

The £2.1bn multi-cap portfolio, which was the third UK equity fund pick from Hollands, aims to provide long-term capital growth and does so through the managers’ Economic Advantage investment process.

This involves looking for companies that either own intellectual property, have a strong distribution network or have recurring revenue streams as a result of either strong branding or the convenience of the product they are selling.

Cross and Fosh believe that these factors are particularly difficult for other companies to replicate and therefore argue that firms with these traits should perform strongly over the longer term.

Over the last 10 years, the fund has returned 241.16 per cent compared to its sector average’s return of 77.18 per cent and its benchmark’s return of 77.38 per cent. When it comes to risk metrics, it is in the top quartile for its downside risk, maximum drawdown, Sharpe ratio and annualised volatility over this period.

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

Liontrust Special Situations has a clean OCF of 0.88 per cent and yields 1.79 per cent. 

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