FE Trustnet research this morning carried comments suggesting that a split is developing in the UK market, with passive funds on one side and less benchmark-aware, higher-conviction active funds on the other.
The latter cannot compete on cost with passives, but they can offer the potential for outperformance of the FTSE and diversification benefits if markets fall.
Below are five funds that have consistently succeeded using a high-conviction approach.
A fund’s alpha is the returns it makes over that of a benchmark, representing the extra gains an investor would make from holding it rather than the index.
Its tracking error measures how far its daily returns differ from the index, representing how dependent on the benchmark it is.
FE Trustnet searched for the funds that have returned top-quartile alpha figures over the past three years with the highest tracking error to the FTSE All Share, excluding those funds that concentrate on a particular sector rather than the whole market.
Standard Life UK Equity Unconstrained
This £707m portfolio is run by Ed Legget, who uses a high-conviction style. It currently has 50 holdings and is unconstrained by the index.
Our data shows it has produced annualised alpha over the FTSE All Share of 10.41 per cent, while its tracking error is one of the highest in the sector.
The fund has made more than any other of the 243 funds in the IMA UK All Companies sector over the past five years, according to data from FE Analytics, with gains of 199.07 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund also made more money than any other in 2012 and is leading the pack this year too.
It is able to invest anywhere in terms of market cap, but has been overweight the mid cap sector in recent years, a contributing factor to its success.
The fund is available with a minimum initial investment of £1,000 and has ongoing charges of 1.9 per cent.
SVM UK Growth
FE Alpha Manager Margaret Lawson’s £82m SVM UK Growth fund has displayed strong three- and five-year returns, which put it comfortably in the top quartile of its sector.
The fund has made 100.51 per cent over five years and 52.69 per cent over three, compared with figures of 67.22 per cent and 36.66 per cent for the FTSE All Share respectively.
Lawson was bullish on the UK economy at the turn of the year and was proved correct by subsequent events; she has been looking to capitalise on a rebound in domestic consumer demand and her portfolio is in the top quartile so far this year.
The fund is split into three silos that allow the manager to hold a more stable core to the portfolio, add tactical weightings in accordance with where she thinks the business cycle is going, and look for companies with greater growth potential to give her fund a kick.
The fund is available with a minimum initial investment of £1,000 and has ongoing charges of 1.92 per cent.
Unicorn Outstanding British Companies
This is a tiny £20.2m fund that should by rights be much bigger if outperformance was rewarded.
Run by FE Alpha Managers Chris Hutchinson and John McClure, it holds the best ideas from Unicorn managers, including many companies that they have held since they were smaller and then watched grow.
It can, however, unlike other funds run by the group, hold large cap stocks, and includes Rolls-Royce in its top-10. It also holds BAT.
The fund looks for leaders in their field with defendable market positions. Recently it sold Serco after the company was subject to an investigation by the Ministry of Justice relating to alleged misreporting of data on a government contract.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Performance has slipped slightly over one year, with some of the company’s large cap stocks suffering, but it is a top-quartile performer over three and five years, according to our data.
It requires a minimum initial investment of £2,500 and has on-going charges of 1.74 per cent.
Old Mutual UK Dynamic Equity
This £304m fund, run by FE Alpha Manager Luke Kerr, has generated annualised alpha worth 10.68 per cent over the past three years, according to data from FE Analytics.
It also concentrates on stocks outside the FTSE 100, which have outperformed their larger counterparts in recent years.
It is one of the top-10 funds over the past three years, with returns of 82.99 per cent compared with just 36.66 per cent from the index.
The fund has the ability to take both long and short positions, which makes it stand out from the majority of UK equity funds.
It currently has only five shorts – bets on a company’s share price falling – compared with 59 longs.
Like the other funds on this list, it has a high tracking error, suggesting that its movements are less dependent on the benchmark than its competitors.
It requires a minimum initial investment of £1,000 and has ongoing charges of 1.73 per cent.
Unicorn Free Spirit
This is the smallest fund on the list at just £7.1m, which will be reason enough to put off many investors.
However, in terms of performance it is exceptional and has won five FE Crowns. Run by FE Alpha Manager John McClure with Fraser Mackersie, the fund is unconstrained, but concentrates on technology stocks at the lower end of the market cap scale. Investors will likely recognise Cineworld, a top 10-holding at 3 per cent, but most other major holdings are more obscure technology firms such as Iomart, DotDigital and Blinkx.
It is top quartile over one, three and five years. It has the third-best returns in the sector over three years, at 87.39 per cent.
The fund requires a minimum initial investment of £2,500 and has on-going charges of 1.73 per cent.