Funds such as CF Miton UK Multi Cap Income, CFP SDL UK Buffettology and Unicorn UK Income have produced some of their sector’s highest returns over the past five years without overly relying on the FTSE All Share, data from FE Analytics suggests.
The index has made a 54.13 per cent total return over the past five years after being buoyed by strong runs in 2012, 2013 and 2016. Returns in 2014 and 2015 were more muted but the index remained in positive territory with respective gains of 1.18 per cent and 0.98 per cent.
Both the IA UK All Companies and IA UK Equity Income sectors have outperformed the index over this time frame, despite the challenges faced by active managers in the more recent past. The average IA UK All Companies fund is up 59.09 per cent over five years while the gain in the IA UK Equity Income sector stands at 63.61 per cent.
Performance of sectors vs index over 5yrs
Source: FE Analytics
On average, the returns of UK equity funds have come from a close relationship with the index at a time when it was being lifted by factors such as historically low interest rates and unprecedented quantitative easing programmes from the world’s central banks.
FE Analytics shows that the average IA UK All Companies fund has an r-squared ratio – which is an indication of how closely correlated a fund is to an index – of 0.84 and a tracking error while IA UK Equity Income’s r-squared ratio is 0.85. A ratio higher than 0.70 is seen as a high correlation for an active fund.
Meanwhile, the IA UK All Companies sector’s average tracking error – or standard deviation of excess returns over the returns of an index – is 4.05 and the average IA UK Equity Income fund’s is 3.89. A tracking error below 2 suggests a passive approach, while 3 and above indicates a fund is taking bigger positions away from the composition of the benchmark and using a more active style.
Of the 313 funds from the two sectors with a five-year track record, 214 have managed a higher total return than the FTSE All Share. In this article, we will look at the funds to have beaten the index while posting the lowest r-squared ratio and highest tracking error.
The table below shows the 25 IA UK All Companies and IA UK Equity Income funds that have posted lowest r-squared ratios relative to the FTSE All Share over the past five years but still beaten the index.
Source: FE Analytics
MFM Slater Recovery, which headed up by FE Alpha Manager Mark Slater, tops the list with an r-squared ratio of just 0.13. The £31.9m fund focuses on UK companies that are trading on low price/earnings ratios relation to their earnings growth, cash flow and financial position.
This results in a concentrated portfolio of between 30 and 60 stocks. A look at its largest holdings shows little crossover with the dominant constituents of the FTSE All Share, as the likes of Hutchison China Meditech, Restore, First Derivatives, Lok' nStore and Bellway are its biggest positions.
There are some large funds on the list that have outperformed with a low r-squared, including the £2.3bn Old Mutual UK Mid Cap, £1.5bn Marlborough Multi Cap Income, £1.4bn Jupiter UK Growth, £768.3m CF Miton UK Multi Cap Income and £737.1m Standard Life Investments UK Equity Unconstrained funds being the biggest by assets under management.
The following table shows the 25 IA UK All Companies and IA UK Equity Income outperformers that have the highest tracking error relative to the FTSE All Share. Many of the funds on the previous table are also here, only in a different order.
Source: FE Analytics
With a tracking error of 15.17, Standard Life Investments UK Equity Recovery tops the table here. David Cumming’s £55.2m fund has also made a 113.59 per cent total return over the five years in question.
The portfolio is built around UK large- and mid-caps stocks where the manager perceives a ‘recovery’ situation could be on the cards. Its top holdings currently include Barclays, Glencore, Anglo American, Standard Chartered and Enterprise.
Funds with a value tilt, which has been out of favour in recent years but has started to resurge, are towards the top of the list with Standard Life Investments UK Equity Recovery being joined by the likes of L&G UK Alpha Trust and MFM Slater Recovery.