While in some cases the claim is questionable, a large proportion of the UK’s top performing managers are genuine high-conviction managers, investing the bulk of their assets in a handful of their best ideas. FE Alpha Managers Neil Woodford, Nick Train and Alexander Darwall immediately spring to mind, and further afield, Berkshire Hathaway’s Warren Buffett.
There are, however, a handful of funds that are hugely diversified – in some cases investing in more than 100 stocks – which have consistently managed to add value to their benchmarks.
While usually investing in a high number of stocks means a higher correlation to the index, Hawksmoor’s Daniel Lockyer says funds with a very large universe of stocks – such as those in IMA Global or IMA UK Smaller Companies – are able to build a highly diversified portfolio and still add alpha.
He adds that being highly diversified also helps to cut down on single stock risk, which is especially important in a volatile – again, such as small caps.
Here are three highly diversified, consistently outperforming funds:
Marlborough Special Situations
FE Alpha Manager Giles Hargreave is perhaps the highest profile example of a manager who has consistently added value with a diversified portfolio.
The manager’s flagship Marlborough Special Situations fund currently holds 219 companies, with no single holding accounting for more than 1.4 per cent of assets under management (AUM).
Rob Gleeson and his FE Research team rate Hargreave as one of the very best small cap managers in the business, and like his diversified approach to an area as risky as smaller companies – especially as he tends to invest off the beaten track.
“Hargreave is a specialist when it comes to investing in small- and medium-sized companies. He doesn’t look at the entire universe of UK stocks but instead focuses on this subset, where businesses are less developed,” they said.
“It is unusual to have such small amounts of money invested in high-conviction positions, but as the share prices of smaller companies can fluctuate more violently, this diversity limits the impact of a single volatile stock.”
The team added: “The fund’s position in a niche market means it can generate positive returns regardless of broader economic conditions.”
FE data shows that the £831m portfolio is a top decile performer in its sector over a 10 year period, with returns exceeding 310 per cent. Hargreave is also ahead of his sector average, which is also his benchmark, over one, three and five years.
Performance of fund and sector over 10yrs
Source: FE Analytics
Hargreave also runs the UK Micro Cap Growth, Nan Cap Growth and Multi Cap Income funds, which are also highly diversified from a stock point of view.
Invesco Perpetual Global Smaller Companies
Nick Mustoe’s Invesco Perpetual Global Smaller Companies is even more diversified than Marlborough, with the top-10 account for only 7 per cent of assets. No company has more than a 1 per cent weighting.
It thrived under former managers Bob Yerbury and Kathryn Langridge, but Mustoe and his global equities team have done well since taking over since 2010, leading the fund to outperformance versus its sector average and benchmark over a one and three year period.
With returns of 209.07 per cent, Invesco Perpetual Global Smaller Companies has almost doubled the returns of its peers.
Performance of fund and sector over 10yrs
Source: FE Analytics
Though not taking it as its benchmark, the £554m fund has also beaten the MSCI World Small Cap index over the medium and long-term, with less volatility.
Mustoe has recently increased his exposure to the UKS following weak performance in March and April, and taken profits out of Europe. The US is his biggest regional position at 30.51 per cent, followed by Japan at 12.46 per cent and the UK at 9.08 per cent.
Henderson UK Equity Income & Growth
The biggest players in the UK Equity Income sector tend to be best ideas portfolios with at least 35 per cent invested in the top-10. Invesco Perpetual High Income, Artemis Income and Threadneedle UK Equity Income are good examples.
James Henderson does things slightly differently with his Henderson UK Equity Income & Growth fund. He prioritises total returns above all else, and his unwillingness to sacrifice capital growth for the sake of hitting a 110 per cent yield target led his fund to be moved from the IMA UK Equity Income sector to the IMA UK All Companies sector in 2013.
One of the ways he looks to maximise total returns is by investing in the small and mid-cap market. Top-10 positions currently include small cap engineering company Hill & Smith and FTSE 250 chemicals company Elementis.
The manager is mindful not to put all of his eggs in one basket however, holding more than 120 companies in total, with only 5 positions making up more than 5 per cent of the portfolio.
This mixture of aggressive growth and income with an emphasis on diversification has seen the fund shoot to the top decile of its sector over a one, three and five year period.
Performance of fund, sectors and index over 5yrs
Source: FE Analytics
In spite of its heavy emphasis on small and mid caps, the fund has only been marginally more volatile than the average UK Equity Income fund over three and five years.
FE Research sees the £539m as a good diversification tool in equity income portfolio.
“Its riskier approach means the fund’s income policy is less stable than that of its peers, but it also helps him to invest in under-researched areas, typically UK smaller companies,” they said.
“This fund could therefore be viewed as a complementary product to some of the popular choices in the UK Equity Income sector.”
Henderson UK Equity Income & Growth is currently yielding 3.4 per cent.