Neptune UK Mid Cap, Man GLG Undervalued Assets and F&C UK Mid Cap are among some of the UK growth funds with stellar long-term track records that have recovered from their 2016 bottom-quartile returns year-to-date, according to data from FE Analytics.
Last year proved to be challenging for many active managers, following the sharp market rotation from quality growth to value stocks during the second half of 2016. This meant that many managers who have built up strong long-term track records fell short of the mark as their investing style fell swiftly out of fashion.
Since the start of 2017, however, there has been a significant pull-back, with the FTSE World Growth index doubling the returns of the MSCI World Value index year-to-date. This means a number of funds which fell into the bottom quartile for their returns last year have regained their positions near the top of the leader board in 2017, so far.
Performance of indices in 2017
Source: FE Analytics
What is less clear for investors is whether the outperformance of value stocks during the second half of 2016 was the ‘blip’, or whether the outperformance of quality stocks during the first quarter of 2017 is in fact the blip amid a long-term market rotation.
Patrick Connolly, head of communications at Chase de Vere, says investors need to consider whether the 2016 underperformance of these funds is the result of managers making the wrong calls or whether it is due to their style falling out of favour. That said, he urges investors not to rush for the exit door based on the short-term underperformance of a fund.
“Investors who change funds frequently based on short-term performance figures or trying to call markets or trends face much higher ongoing transaction charges and they risk jumping out of funds as their performance bottoms out and into funds just as they are peaking,” he warned.
As such, FE Trustnet has looked at the UK growth funds with strong long-term track records that may have disappointed investors during 2016, but have bounced back with top-quartile returns this year.
One of the funds with the best long-term track records that found itself in the bottom quartile last year is Neptune UK Mid Cap, which is headed up by FE Alpha Manager Mark Martin.
Since its launch at the end of 2008, the five crown-rated fund has returned 385.16 per cent compared to its average peer and benchmark’s respective returns of 164.65 and 313.25 per cent.
On an annual basis, the fund managed to remain in the top quartile during every year until the end of 2015, apart from in 2013 when it achieved a second-quartile return.
This all changed last year, however, when the £575m fund returned 3.93 per cent compared to the sector average’s return of 10.82 per cent. While UK mid-cap stocks struggled relative to their larger and smaller peers last year due to Brexit-related uncertainty, the fund also failed to beat its FTSE 250 benchmark which returned 5.08 per cent.
This is a far cry from how the fund has performed this year, given that it is up 8.6 per cent year-to-date while its average peer has returned 5.94 per cent.
Neptune UK Mid Cap isn’t the only FTSE 250-focused fund to have leapt from bottom-quartile returns in 2016 to top-quartile returns so far this year. Other names – which also boast strong long-term track records – include Threadneedle UK Mid 250, Schroder UK Mid 250, F&C UK Mid Cap, Royal London UK Mid-Cap Growth and Franklin UK Mid Cap. This could be due to the fact Article 50 has now been triggered, which means EU exit negotiations are underway and there is arguably less Brexit uncertainty.
Performance of indices in 2016
Source: FE Analytics
Somewhat more surprisingly, a small number of funds on the list of bottom-quartile performers last year that have done well this year have a value or recovery bias.
While many funds with this mandate rallied towards the end of 2016 and recovered any losses made during the first half of the year, some were left trailing the dust with bottom-quartile returns.
Almost paradoxically, these value-based funds have achieved strong returns year-to-date despite quality stocks falling back into favour. However, investors should note that the funds which fall under this category and appear on the list are underweight large-caps and overweight mid-caps relative to the FTSE All Share.
One example is FE Alpha Manager Henry Dixon’s Man GLG Undervalued Assets fund, which aims to find stocks that have underrated profit streams and are trading below their estimation of its replacement cost. Its largest current holdings include the likes of Aviva, Rio Tinto and Imperial Brands although it has a 36.77 per cent overall weighting to mid-caps.
While the £522m fund returned 5.26 per cent last year compared to its FTSE All Share benchmark’s return of 16.75 per cent, it has comfortably doubled its performance year-to-date with a 10.23 per cent return. Since its launch, it has outperformed its sector average and benchmark by 11.58 and 11.88 percentage points respectively with a total return of 39 per cent.
Performance of fund vs sector and benchmark in 2017
Source: FE Analytics
Other value funds that were in the bottom quartile last year and are in the top quartile this year include MFM Slater Recovery, M&G UK Select and Miton UK Value Opportunities.
As to be expected, a number of UK growth funds also fell into the bottom quartile last year but have rallied year-to-date. One example is Jupiter UK Growth, which has been headed up by Steve Davies since 2013. The £1.4bn fund has long been overweight financials and holds Barclays, Lloyds Banking Group and Legal & General as its largest individual weightings.
While it lost 6.41 per cent last year, the fund has returned 8.2 per cent so far in 2017 as heightened inflation expectations have bolstered the performance of bank stocks.
Since Davies has managed the fund, it has returned 58.37 per cent compared to its sector average’s return of 56.39 per cent and its benchmark’s return of 51.16 per cent.
Other funds that fell into the bottom quartile last year but are some of the best performers year-to-date include Premier Ethical, Artemis UK Select, TB Saracen UK Alpha and Liontrust UK Ethical.