Three mid-cap funds have outperformed a FTSE 250 tracker with a lower correlation to large-caps, according to the latest data from FE Trustnet.
The HSBC FTSE 250 Index, which tracks the mid-cap index, has an r2 figure to the FTSE 250 of 0.97 – easily more than any active mid-cap manager, but a figure of 0.49 to the FTSE 100 – the highest compared to active mid-cap managers.
R2 represents the percentage of a fund portfolio's movements that can be explained by movements in a benchmark index – i.e. how correlated its performance is to the benchmark and having looked at all UK funds previously, in this article FE Trustnet takes a closer look at the mid-cap space.
Performance of tracker vs FTSE 100 and FTSE 250 over 5yrs
Source: FE Analytics
Ryan Hughes, head of fund selection at AJ Bell, said: “I think the reason would probably be that the largest constituents of that index dominate and that the active managers in that space are potentially – and I’m theorising here – will be looking further down that index than at the top bit.
“That top bit will have a greater correlation to the FTSE 100 just by getting dragged along with size as opposed to the bottom part of it.
“I think managers will see their opportunity set looking down the FTSE 250 and getting away from the top whereas the tracker is obviously going to track the index and should be weighted at the top.
“Intuitively that makes sense and if I think about any index and the way that managers invest they tend to find opportunities when they look down [the market cap spectrum].”
As such, we look at the four mid-cap funds with an r2 figure to the FTSE 100 of less than 0.3 that have outperformed the FTSE 250 tracker.
The top performer over the last five years in the mid-cap space has been the five crown-rated Old Mutual UK Mid Cap run by FE Alpha Manager Richard Watts.
The £2.46bn fund has a high r2 to the FTSE 250 (0.81) but a low score versus the FTSE 100 (0.27), as highlighted by the below graph.
Performance of fund vs FTSE 100 and FTSE 250 over 5yrs
Source: FE Analytics
The fund has outperformed the FTSE 250 by 62.53 percentage points and the FTSE 100 by 113.38 percentage points over the period.
In its latest note, Square Mile Research said: “The team have consistently applied their "market cycle" approach to investing over a number of years which has generally proven to be successful over the life of the product.
“Given the process and experience of its members, the team is sufficiently resourced and consists of some of the most respected investors in the UK mid and small cap space. This fund offers investors solid exposure to the UK mid cap market.”
The fund, which includes Paysafe, Boohoo.com and Ascential as its top three holdings, has a yield of 0.91 per cent and a clean ongoing charges figure (OCF) of 0.85 per cent.
Second on the list is fellow five crown-rated fund Neptune UK Mid Cap run by FE Alpha Manager Mark Martin (pictured) and deputy manager Holly Cassell. 
The £614m fund has an extremely low r2 figure to the FTSE 100 (0.2) but also to the FTSE 250 compared to the other funds (0.56).
This suggests a stock picking approach with less emphasis on the larger constituents of the index (as alluded to by Hughes above).
Indeed, the fund invests in companies listed in the FTSE 250 as well as the top 50 companies by size in the FTSE Small Cap Index explaining the lower figures.
The fund has outperformed the FTSE 250 and FTSE 100 by 20.20 and 71.05 percentage points respectively over the last five years, returning 125.58 per cent.
The fund has a yield of 1.68 per cent and an OCF of 0.82 per cent.
Next up is the £186m AXA Framlington UK Mid Cap fund run by Chris St John and Nigel Thomas, which has returned 124.07 per cent over the last five years.
The fund has a high r2 to the FTSE 250 (0.85) but a low score versus the FTSE 100 (0.29), as highlighted by the below graph.
Performance of fund vs FTSE 100 and FTSE 250 over 5yrs
Source: FE Analytics
The fund is 11 per cent weighted to the FTSE 100, 72.17 per cent to the FTSE 250 and 10.55 per cent weighted to small-caps and those on the alternative investment market (AIM).
Square Mile Research said: “Chris St John is an articulate fund manager who has consistently applied his investment approach for over 10 years. During this time he has enjoyed a good level of performance success primarily managing UK small and midcap strategies.
“The manager's overarching philosophy is the belief that companies with the ability to compound their returns over time without taking on excessive levels of debt will outperform.
“Whilst that might sound somewhat obvious and simplistic, we do support the view that, over the longer term, higher quality companies tend to outperform.
“This is a sensibly managed fund that seeks to meet its investment objective in a steady and reliable fashion and, over the longer term, we believe that investors should be well served by an experienced manager who is part of a strong team.”
The fund has an OCF of 0.85 per cent and a yield of 1.4 per cent.
The final fund to outperform the HSBC FTSE 250 Index tracker with a lower r2 figure to the FTSE 100 is Threadneedle UK Mid 250 run by James Thorne and Matthew Evans.
The £105m fund has a high r2 to the FTSE 250 (0.85) but a low score versus the FTSE 100 (0.26) and has outperformed both indices over the last five years.
The fund, which must have at least two-thirds of its assets in mid-cap companies, includes Ascential, Micro Focus International and Paysafe as its top three holdings.
The portfolio is underweight industrials and financials while overweight technology, healthcare and consumer services.
It has a yield of 1.4 per cent and an OCF of 0.89 per cent.