Investors who bought into some of the top-performing UK equity funds three years ago – such as Neptune UK Mid Cap, Threadneedle UK Equity Income and Liontrust UK Smaller Companies – would have been rewarded with another three years of sector-topping returns, according to research by FE Trustnet.
But this does not mean that rushing into funds that have already done well is always a prudent strategy as our data shows that some portfolios that were in their sector’s top quartile over the three years to the end of 2013 have fallen to the bottom in the time since.
One of the core rules of investing is that past performance is no guide to future returns but this does not stop investors from piling into funds that have just gone through a strong run of performance in the hope that it continues.
Performance of sectors vs index between 1 Jan 2011 and 31 May 2017
Source: FE Analytics
As the chart above shows, the average fund in the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies has enjoyed a relatively decent run over the years since 1 January 2011. All three of the peer groups have beaten the FTSE All Share’s 68.99 per cent total return over this time frame.
In this research we wanted to find out what would have happened to the investor that picked the top-performing funds at the end of the first three years of this period so we have compared total returns between 1 January 2011 and 31 December 2013 with those generated between 1 January 2014 and 31 May 2017.
FE Analytics shows that there were a total of 85 in their respective sector’s top quartile during the first period. When it comes to the more recent period, 30 stayed in the top quartile, 26 are in the second, 16 are in the third and only 13 dropped into the bottom quartile.
Over the coming pages, we look at each peer group in more detail to see which funds have managed to hold onto the top-quartile ranking as well as those that have fallen into the bottom.
IA UK All Companies
Source: FE Analytics
As the table above – which reveals the 24 IA UK All Companies funds that are in the sector’s top quartile over both periods examined – shows, the best performing fund over the three years to the end of 2013 was Neptune UK Mid Cap and it managed to turn in first quartile returns over the following period.
It has FE Alpha Manager Mark Martin and Holly Cassell at the helm and holds five FE Crowns for superior performance in terms of stockpicking, consistency and risk control over recent years. The fund allocates stocks into three buckets (economic recovery plays, structural growth stories and corporate turnarounds), which has helped it to generate strong returns in varying market conditions.
However, it is not the only mid-cap fund on the list – which should not be surprising given the strong run in the FTSE 250 over recent years. Old Mutual Equity 1, Old Mutual UK Mid Cap, Royal London UK Mid-Cap Growth, Threadneedle UK Mid 250 and HSBC FTSE 250 Index also have a focus on this part of the market.
Elsewhere, CF Lindsell Train UK Equity is another fund that has caught investor attention in recent years because of its strong returns while Liontrust Special Situations has also been consistently outperformer. Both funds were highlighted by FE Trustnet for being among the best of the sector on a wide range of return and risk metrics over recent years.
But not every fund in the sector held onto its top quartile rankings in the more recent time frame and nine dropped into the bottom quartile. Three of these are managed by Schroders – Schroder UK Opportunities, Schroder Recovery and Schroder UK Mid 250 – while Jupiter Growth & Income, Jupiter UK Growth and Standard Life Investments UK Equity Unconstrained also appear on the list.
IA UK Equity Income
Source: FE Analytics
There are only three IA UK Equity Income funds that boast top quartile numbers of both periods we looked at in this research.
MI Chelverton UK Equity Income made the highest return in each of the two periods. Managed by David Horner and David Taylor, the £517.1m fund focuses on smaller companies and aims to grow its dividend in excess of inflation over the long term.
Martin Cholwill’s £1.9bn Royal London UK Equity Income fund is another that has built up a strong track record thanks to a bias towards mid-caps. The FE Research team said: “The fund has consistently produced better-than-average returns since Cholwill took over in 2005. It tends to be one of the best performers in its sector when markets are rising, but does a little worse when they fall.”
Threadneedle UK Equity Income, which also holds five FE Crowns, typically invests in companies that are undervalued or overlooked by other investors. While this can lead to higher levels of volatility than its average peer, it has tended to protect capital well in difficult years as well as capture upside in any rebounds – which will have helped in the varying conditions seen in the years examined here.
Two funds from the IA UK Equity Income sector went from the top quartile to the bottom in the two periods covered by this research: Old Mutual UK Equity Income, which recently witnessed a change in manager, and QAM Downing Monthly Income.
IA UK Smaller Companies
Source: FE Analytics
Again, there are three funds in the IA UK Smaller Companies that were top quartile between 1 January 2011 and 31 December 2013 then managed to hold onto this position in the following period.
The fund holding making the highest returns over both is Liontrust UK Smaller Companies, headed up by the FE Alpha Manager duo of Anthony Cross and Julian Fosh as well as Victoria Stevens and Matthew Tong. The fund is built around the managers’ Economic Advantage process – which buys companies with intangible assets such as desirable intellectual property, strong distribution channels and significant recurring business.
Marlborough UK Micro Cap Growth is managed by small-cap veteran Giles Hargreave and has a bias towards growth-focused areas of the market, such as technology and industrials. “The manager is cautious and controls risk by investing in a very large number of stocks, often over 200, to dilute the effect of poorly performing ones. This means the fund is less exposed to single-company risk than many of its peers,” the FE Research team added.
AXA Framlington UK Smaller Companies has been managed by Dan Harlow since June 2016; Henry Lowson and Chris St John were on the portfolio prior to this. The portfolio has its largest weightings towards growth sectors such as industrials, technology and consumer services.
Turning things on their head and two funds moved from the top quartile to the bottom between the two periods – Investec UK Smaller Companies and Baillie Gifford British Smaller Companies.