While global markets have rebounded well from the March sell-off, the UK has struggled to react in a similar fashion. However, some UK strategies have managed to achieve above average returns and the CFP SDL Free Spirit fund, run by Andrew Vaughan, is one such example.
Vaughan has managed the fund since 2019 alongside Keith Ashworth-Lord, manager of the £1.3bn CFP SDL Buffettology fund.
Sitting in the IA UK All Companies sector, the fund has greater exposure to small-and mid-cap equities than many of its peers, something that helped distinguish its performance in the recovery.
The manager explained that holding large amounts of cash prior to the decline afforded a level of flexibility that other funds couldn’t operate with.
This combined with the bottom-up approach that selects businesses that should do well regardless of what happens in the wider market was especially useful for the fund.
“You can get tricked into doing some really stupid things if you follow the ups and down of the news,” he said.
In March, the FTSE 100 plunged by 25 per cent in the three months to the end of March, which marked the biggest quarterly decline in the UK since Black Monday in 1987.
“It would have been easy to get intensely negative in March,” he said. “But it would have been very harmful to investors in the fund.”
Performance of the fund vs sector YTD
Source: FE Analytics
Year-to-date the £29.6m CFP SDL Free Spirit fund has made 4.75 per cent, while the IA UK All Companies sector has lost 20.66 per cent.
The manager explained owning businesses for the long-term takes that short-term hysteria out of the decision-making process.
“We’re committed in our business ownership, we’re not stock traders,” he said.
This investment style, which Vaughan described as ‘Business Perspective Investing’ also looks for high returns on capital, strong free cash generation and a high predictability of performance when screening companies.
“We particularly like businesses that aren’t trying to be the cheapest on the market,” he added. “Providing a product or service that customers are happy to pay for and are happy to commit to for a long time.”
Tabletop games manufacturer, Games Worksop is one such company that displays considerable brand loyalty. It’s a favoured holding at Sandford DeLand and is held in both the Free Spirit and Buffettology portfolios.
He said: “Games Workshop is a really strong community, it’s a real hobby that people invest a lot of time in and the company have been very good at nurturing that community.”
The company have enjoyed success in monetising their intellectual property and have expanded their clientele into the US and Europe after historically being predominantly UK-based.
Despite Free Spirit’s focus on small- and mid-caps, the fund has key exposure to large-caps which acts as a buffer in periods of volatility.
“If you’re investing in Free Spirit, you’ll primarily get exposure from small- and mid-caps, but crucially, you’re getting fantastic liquidity,” he explained.
“The liquidity is there for two reasons. One, is we’ve always got a big pile of cash in the fund; and, two, as the name implies, the free spirit to be able to invest across the UK market cap spectrum.”
When liquidity issues arrive, open-ended investors can become concerned about redemptions, particularly in smaller funds like CFP SDL Free Spirit.
Vaughan says the presence of FTSE 100 companies allowed the fund to withstand periods when small-caps go out of favour.
“Investing in the fund gives predominantly small- and mid-cap exposure,” he said. “But not at the expense of performance.”
One of the reasons the fund was able to distinguish itself from its peers was its large cash position: when the markets turned down at the end of February, the fund had nearly 20 per cent in cash.
“Part of the reason that cash was so high was because we have a very disciplined approach to valuation,” he said. “If the opportunities aren’t there then we’d prefer to hold the cash, because sure enough the opportunities do come around.”
Holding that level of cash afforded a level of flexibility when markets sold-off sharply in March. Combined with the long-term business ownership ethos of the fund that meant they weren’t looking to offload holdings.
“It puts you in such a different situation from people who weren’t sitting on cash,” he added. “Simultaneously having redemptions and selling in that market is precisely what you want to avoid.”
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over three years, the £29.6m CFP SDL Free Spirit fund has made a total return of 36.7 per cent, against a loss of 12.53 per cent for the IA UK All Companies fund. It has an ongoing charges figure (OCF) of 1.21 per cent.