CF Lindsell Train UK Equity, Majedie UK Income and MFM Slater Growth are among some of the funds with the lowest charges, the highest alpha generation and the best genuinely active returns over the last five years relative to the FTSE All Share, according to a study by FE Trustnet.
To find these results, we looked at all funds within the IA UK All Companies and IA UK Equity Income sectors with track records of more than five years (excluding passive vehicles and institutional-only funds) that have managed to outperform the FTSE All Share over this time frame. We also discounted any funds with ongoing charges figures (OCF) of 0.97 per cent – the median average of the list – or above.
We then calculated the median alpha generation and information ratio among these funds. The former metric measures the extra value created by a manager’s movements in relation to the benchmark. For instance, if a fund has an alpha generation of 3, it has created additional gains relative to the benchmark of 3 per cent.
The latter metric deducts the returns of a benchmark from a fund’s overall gains. This is then divided by its tracking error – which measures the volatility of a fund’s excess returns. This results in a measurement of a manager’s skill and knowledge to enhance fund returns.
Isolating the list of funds that beat the median scores, we then ‘double distilled’ the data, recalculating the average alpha generation, OCF and information ratio and further deducting funds that didn’t make the cut. We also only included the funds that beat the average five-year returns of vehicles which outperformed in terms of alpha and manager skill.
This left us with a final list of 12 funds, which are shown in the below table:
Source: FE Analytics
The fund with the lowest OCF at 0.72 per cent is CF Lindsell Train UK Equity, which has five FE Crowns and is headed up by star manager Nick Train. It also has a five-year alpha generation of 7.64 and an information ratio of 0.94 (according to FE Analytics, an information ratio of 0.5 reflects a good performance, 0.75 very good, and 1 outstanding).
Over five years, it has outperformed its average peer and FTSE All Share benchmark by 48.05 and 56.53 percentage points respectively with a total return of 119.48 per cent.
Train aims to provide long-term capital appreciation through a low-turnover and markedly concentrated portfolio of between 20 and 35 stocks. Its largest holding, Unilever, accounts for more than 10 per cent of the overall portfolio.
Other significant holdings include Diageo, Heineken and Mondelez – Train is well-known for his bias towards consumer products with strong branding power and very long-term business track records.
The fund on the list with the second-lowest OCF is Majedie UK Income at 0.77 per cent. Headed up by FE Alpha manager Chris Reid, the four crown-rated fund aims to provide an attractive yield while outperforming the FTSE All Share on a total return basis.
Reid also has a high-conviction portfolio at 51 holdings and adopts a bottom-up approach to stock selection. Like Train, he can invest across the market cap spectrum and currently has a 17.5 per cent weighting in FTSE 250 stocks, 8.5 per cent in FTSE Small Cap constituents and 5.7 per cent in AIM stocks.
Its largest individual holdings though include the likes of Legal & General, Aviva, BP and Unilever.
Over five years, it has outperformed its average peer by 36.54 percentage points with a total return of 106.24 per cent and, in terms of income alone, would have paid out £3,135.47 on an initial £10,000 investment. It currently yields 4.8 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
In third place with an OCF of 0.8 per cent is fellow FE Alpha Manager Mark Slater’s MFM Slater Growth fund. While it has the lowest five-year information ratio on the list of 0.59, it has the third-highest alpha generation at 12.94.
Slater aims to provide capital appreciation through a multi-cap bottom-up stock selection approach. Like Train, he is unafraid to utilise his non-UK weighting allowance, with long-term holdings Walt Disney and Hutchison China Meditech accounting for two of his 10 largest holdings.
At the same time, the manager finds a lot of his opportunities in the domestic-facing mid-cap area of the UK market and holds the likes of Bellway, Galliford Try and Paysafe Group.
Over five years, the five crown-rated fund has achieved a total return of 125.74 per cent compared to its sector average’s return of 71.43 per cent.
The fund on the list with the best five-year alpha generation overall though – at 14.67 per cent - is Old Mutual UK Mid Cap, which is perhaps unsurprising given the FTSE All Share’s large-cap bias.
Managed by FE Alpha Manager Richard Watts, the £2.8bn fund has a portfolio of 43 stocks which are chosen based on their business models, the health of their balance sheets and their ability to generate superior growth. Watts also takes macro views into consideration as he believes UK mid-caps are also sensitive to the business cycle.
Over five years, the five crown-rated fund has returned 177.41 per cent – the strongest performance out of all funds on the list – and has done so with an information ratio of 1.04.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
In second place for its alpha generation of 14.02 is CF Miton UK Multi Cap Income, which also has a distinct focus on companies further down the market cap spectrum. For instance, it currently has a 34.4 per cent allocation to AIM stocks, an 18 per cent allocation FTSE 250 stocks and holds just 17.6 per cent in UK blue-chips.
The five crown-rated fund, which is managed by Gervais Williams and FE Alpha Manager Martin Turner, has a highly-diversified portfolio of 145 holdings, which it aims to maintain to maximise portfolio liquidity.
Over five years, the £918m fund has returned 130.65 per cent and, based on an initial £10,000 investment, would have paid out £ 2,910.40 in income alone. It has an information ratio of 0.81 and is in joint-fourth place for its OCF of 0.81 per cent alongside F&C UK Mid Cap.
F&C UK Mid Cap, which is managed by Thomas Wilson, has a five-year information ratio of 0.75 and an alpha generation of 10.09.
The four crown-rated fund is just £34m in size and includes the likes of Howden Joinery, Informa and John Laing Group in its list of top 10 holdings.
Over five years, it has outperformed its average peer by 56.96 percentage points with a total return of 128.39 per cent.
Aside from UK mid-cap funds, other vehicles that deserve honourable mentions for their OCFs, alpha generation and information ratio relative to the FTSE All Share include Marlborough UK Multi-Cap Growth, R&M UK Dynamic Equity, Investec UK Alpha and Franklin UK Managers’ Focus.