The IMA UK All Companies sector has become increasingly popular with investors in recent months as the economic recovery gains traction and investors look to capture its growth.
However, with much of the past few years’ growth coming from medium sized companies, several analysts and managers have recently warned the space may be due a slow-down.
Spear (pictured) has a generally bullish outlook for UK companies up and down the market cap spectrum over the next five years, but says there is little point investing in something as specific as a UK mid cap fund.
“The feel good factor is definitely returning to the economy. I don’t think it is overly strong but is very obviously better than it was and it is worth taking on risk, provided you are already well diversified,” he said.
“Over a five year period I recommend investing 100 per cent in UK equities but the journey will not be a smooth one, making the case for investing in funds with a flexible mandate.”
The FTSE 250 has almost doubled the returns of the FTSE 100 over the past three years, rising 46.3 per cent compared to 24.14 per cent.
Unsurprisingly, the best performing funds in the sector have been those with a specific bias towards the lower end of the market cap spectrum, such as the likes of Neptune UK Mid Cap and AXA Framlington UK Mid Cap.
Both funds have returned more than 75 per cent over the three year period, beating the IMA UK All Companies sector average by almost 50 percentage points.
Performance of funds, sector and indices over 3yrs
Source: FE Analytics
In spite of their stellar run, Spear says funds with a narrow mandate have a greater chance of encountering a difficult period of performance than their more flexible, multi-cap rivals.
“Take the Franklin Templeton UK Mid Cap fund for example – it’s very good fund and there are no reasons to have an issue with it but it has a badge on it which says mid cap, which can constrain the manager to go down that road,” he said.
Spear adds that buying an area of the market following a strong period of performance makes a specialist area such as mid-caps an even riskier bet.
From a risk return point of view funds in the IMA All Companies sector have tended to be rewarded for taking on risk in recent years, with a clear relationship shown between performance and higher annualised volatility in the medium and long-term.
All 10 of the best performing funds over a five year period have a higher annualised volatility than their sector average for example, many of which that have a specific mid-cap focus.
Risk/return of UK All Companies funds over 5yrs
Source: FE Analytics
It isn’t only mid cap funds that have performed strongly, however. A number of multi-cap funds have benefitted from a significant skew towards mid caps, including the likes of Standard Life UK Equity Unconstrained, R&M Equity Long Term Recovery and Henderson UK Equity Income & Growth.
Spear favours Ed Legget’s £1.1bn Standard Life portfolio, which he still recommends in spite of its stellar five year numbers. The fund targets undervalued stocks, and has the flexibility to move across sectors across the FTSE 100, FTSE 250 and FTSE Small Cap indices.
“Standard Life Investments UK Equity Unconstrained is absolutely appropriate for people who understand risk and are investing for the medium to long term,” he said.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
“It offers a good mix of large and mid cap stocks. My only concern is its size but I think it will continue to perform well.”
“I’m a great believer in flexibility – it is the key. He [Legget] can go mid cap, large cap or small cap or even AIM stocks if he wishes.”
Legget has recently changed the focus on his portfolio, selling out of cyclical mid caps that have benefitted from the improving domestic economy, in favour of those with greater exposure to emerging markets.