Report: IMA UK All Companies

UK equity markets dropped significantly over the past year, as a result of the credit crunch. This drop is clearly reflected in our data, with a sector average loss of 18.3% over the year to July 2008, posted by Financial Express Analytics. This is 3% greater than the 15.3% loss made by the FTSE All Share Index over the same period, which further justifies the reduced popularity of the sector as a whole over the past year. It is also worth pointing out that only one fund was able to post a positive return over the period – Manek Investment’s Growth fund, which returned 13.5% over the year to July 2008.

Given the sphere of activity by funds seeking to search for capital gains, the majority tend to invest in small to medium sized companies, given their scope for growth. As a result, the sector as a whole posted a slightly higher annual volatility to last month end (June 2008) of 15.5%, when compared to the FTSE All Share Index’s 15.2% over the same period. When addressing constituent funds’ sensitivity to this Index (reflected by its beta) we uncover an average beta of 1 between funds and the FTSE All Share Index – This means that if the market (FTSE All Share Index) goes down 100%, the average fund, (according to this metric), should also go down 100%. This sensitivity measure also represents the cyclicality of these funds to the market, and hence the importance of market direction to the performance of such funds.

A fund that stands out once again is Manek Investments’s Growth fund, which only possesses a beta of 0.1 and an R-squared of 0.04 – meaning that only 4% of the funds returns are reflected by changes in the overall FTSE All Share Index’s return, which is supported by the low correlation of 0.2 between the Index and the fund. Moreover, when addressing risk-adjusted returns it is also clear that Manek Investment’s 8.31% volatility over the year is considerably lower than the sector average and the FTSE All Share Index over the period, and is in fact the 2nd lowest overall. Coupled with the comparatively meteoric return, this fund is head and shoulders above the rest on a risk-adjusted basis as well. These results can be further expressed by this particular fund being the only one to have posted a Sharpe ratio above 1, of 1.59. (See Financial Express Glossary for definition of terms).

The Manek growth fund has been a clear outlier, given its sterling results whilst all others have failed to even preserve capital. The fund has done well given its mandate possessing the flexibility to invest worldwide in any economic sector, and ability to use derivatives for the purposes of efficient portfolio management. Nevertheless the fund has maintained 75% exposure to UK Equities, and 25% to North American equities, making this result even more impressive whilst equity markets within these regions have significantly dropped. Although having under-performed the sector average for many years, the fund’s investments have seen the fund surge as being ranked no.1 in performance over the past year, with it now being up as the 2nd best when extending that horizon longer-term, posting a 3 year return of 51.8%. When addressing the holdings, we see a clear overweight stance in energy stocks, which have done relatively well over the year, and have resulted in the surge in this fund’s returns. Another noticeable style by this boutique fund provider, is that the top 10 holdings constitute almost a third of total holdings, highlighting a high conviction in these investments.

As the credit crisis continues to unfold, coupled with escalating qualms of a UK recession, investors should maintain a cautious outlook for this sector. As these funds are highly exposed to growth stocks, which have seen negative growth over the past year, and given the average beta (sensitivity) to the market of 1, a momentum investing approach should be followed. With the momentum leading into a bearish market, reflected by studies from asset management houses such as JP Morgan stating that market sentiment is at its lowest levels for almost 30 years, investors wanting to seek capital growth, even those with the intention of picking up ‘value’ from growth stocks at low prices, may prefer to wait until growth sentiments are revived before divulging large amounts to cash into the funds within this sector.

*Source of all data: Financial Express Analytics