The best-performing fund in the sector – Neptune UK Mid Cap – has made 97.34 per cent over the past three years while the best emerging markets fund – First State Global Emerging Markets Sustainability – has gained 38.47 per cent.
Many UK funds have produced outstanding returns while exotic sectors such as emerging markets, which have received greater press, have stagnated. In fact, the average return of a top-quartile UK fund over that time – there are 67 – is 68.98 per cent.
Most of the funds that have done the best have made their money in the mid cap area of the market, and I want to tap into this in my pension. Given that I’m investing for 30 or 40 years in the future, I want to maximise my growth potential.
You always have to be wary of investing in something after it has done well for a long time, but I think the outlook for the mid cap sector is still strong.
Whatever you think of the political manipulation of the housing market, it is good news for investors in a number of sectors linked to housing and to growing consumer confidence.
I’m drip-feeding into a pension so I’m not particularly bothered if large caps start to catch up for a bit: in the longer run, mid caps are likely to grow more. Losing more in a sudden, unexpected market crash doesn’t really bother me as I would expect the companies to rebound further eventually.
This is why I’ve got a decent position in the Schroder UK Mid 250 fund, managed by FE Alpha Manager Andy Brough.
The first thing to be said is that for those of us without a SIPP, our choice of funds is limited by our provider. There are mid cap funds I’d be very interested in holding if they were available on my plan. Nonetheless, Brough’s fund has some key selling points that make it attractive.
What I like about it is that it is highly sensitive to the FTSE 250. The fund has a beta of 0.94 over the past three years, meaning that it can be expected to rise 0.94 per cent when the market rises 1 per cent – and make corresponding losses.
Having a fund with a lower beta is often considered preferable – allied with returns that beat the market, it can be a sign of a good stock-picker – but for my purposes, that is not important. I am investing in this fund for access to the FTSE 250, so I am happy with a high-beta portfolio.
Brough’s stockpicking has also added a decent amount of value as well. He has added 0.8 per cent of alpha – annualised – over the past three years, which puts the fund in the top quartile of the sector. Alpha measures the extra gains a fund makes over its benchmark.
Schroder UK Mid 250's volatility of 17.55 per cent puts it in the bottom quartile of the sector for this measure – 234th out of 268. However, with my long-term time horizon, I am not worried about that.
A fund’s Sharpe ratio combines the volatility and alpha to give us a number representing risk-adjusted returns. A high Sharpe ratio means that a manager has made more gains per unit of risk he has taken on. In a sense, you are judging whether the risk taken on was "worth it", compared with other funds in the sector.
On that basis, Brough scores well, with the fund’s figure of 0.86 putting it in the top quartile – 46th out of 268.
However, Brough’s stockpicking has been dubious at times in the past by his own admission. When I interviewed him last autumn, he was open about the fact that he has got things wrong.
Brough lost money buying stocks such as HMV, which collapsed last year, and not cottoning on to the transforming power of the internet.
In fact, despite his decent figures, it is noticeable that the fund has only really picked up in performance terms over the past couple of years.
Over three years, it has not quite caught up to the index, having trailed it for the first half of that period.
Our figures show the fund has made 67.3 per cent while the FTSE 250 (ex IT) has made 68.48 per cent.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
However, over the past year it has rocketed ahead, making 49.77 per cent while the benchmark has made 36.31 per cent.
Performance of fund vs benchmark over 1yr
Source: FE Analytics
Brough really seems to have taken on board the lesson of the importance of the internet, as shown by the appearance of the Daily Mail & General Trust in his top-10.
When I spoke to him, he was also very vocal about looking for stocks that utilise the web.
I think that people have been slow to catch on to how important the internet is, and that a lot of businesses that do well will be those that make the most of what it has to offer.
I think I’m likely to do better in the near future by buying into the UK mid cap sector rather than into emerging markets funds.
Although I think that good managers will make money in the sector, I am convinced by the arguments that the main indices and funds that follow them closely will not – and those are the funds available to me.
When managers of the stature of Angus Tulloch and Jonathan Asante – who head up First State's Asia Pacific and Emerging Markets funds – say that their markets are full of poor-quality companies, I think investors should listen.
Those managers have started to shift their focus to companies listed in the developed world that are making money by selling into the emerging markets.
Many mid cap companies are doing exactly that, which will act as another headwind for them over the next few years.
