Top-performing funds like Majedie UK Income, Schroder Income and Old Mutual UK Equity Income have found themselves turning in bottom-quartile performance numbers over the last 12 months but investors should be wary of selling on the back of such short-term dips, according to the experts.
All three of the above funds have fallen into the fourth quartile of their respective sectors over the year to the end of February, although they were some of the best performers in the peer group in each of the three discrete 12-month periods prior to this.
Although it can be difficult for some investors to hold on to a fund that goes from looking like one of the best in its sector to one of the worst, investment experts warn against making allocation decisions based on a single data point and over short time frames.
With this in mind, we look at reasons why a year of underperformance from these funds should not lead to an automatic decision to sell them – and why some investors might consider topping up their holdings.
This £1.1bn fund, which is headed up by FE Alpha Manager Chris Reid, fell 8.94 per cent in the 12 months to the end of February, against a 3.34 per cent decline by its average peer and a 7.32 per cent drop in the FTSE All Share.
In comparison, it was the highest returning member of its sector in the period immediately before this, after its 16.27 per cent return was around 10 percentage points higher than its average peer and the benchmark.
Performance of fund vs sector and index since launch
Source: FE Analytics
Richard Troue, head of investment analysis at Hargreaves Lansdown, notes that Majedie UK Income’s poor year is partly down to its exposure to resources and financial stocks, which have been hit hard in recent months. Top 10 positions include the likes of Lloyds Banking Group and Rio Tinto.
“The manager’s process involves looking for undervalued and out of favour companies where there is potential for change or a reversal in fortunes. With this in mind it is not surprising to see some exposure to resources, for example,” Troue said.
“While a spell of poor performance is never comfortable, this kind of approach can see periods like this as the manager will inevitably be early in some of his calls. Over the long term though, buying undervalued but fundamentally sound companies and waiting patiently for them to improve is a tried and tested strategy and an approach I like. I continue to believe investors will be well-served holding for the long term and possibly using the recent weakness to top up.”
Troue adds that the fund does have around half of its assets invested in medium-sized companies, which have the potential to boost growth and offer the potential for a rising dividend stream over the long term. However, this could means it is not suitable for investors uncomfortable with the additional risks associated with investing in smaller and medium-sized companies.
Majedie UK Income has a clean ongoing charges figure (OCF) of 0.77 per cent and yields 4.41 per cent.
Kevin Murphy and Nick Kirrage’s £1.4bn Schroder Income fund lost 12.92 per cent in the year to the end of February as its value approach to investing continued to be out of favour; its average peer in the IA UK All Companies sector (the fund moved peer groups last year after failing to hit the IA UK Equity Income sector’s yield target) was down 5.22 per cent.
Performance of fund vs sector and index under Murphy and Kirrage
Source: FE Analytics
As the graph above shows, the fund has performed broadly in line with its average peer and has beaten the FTSE All Share by around 10 percentage points under the current managers. Over 20 years it has significantly outperformed the index and sector with a 442.41 per cent total return, demonstrating the long-term potential of the value investing style.
Tilney Bestinvest’s Jason Hollands said: “This isn’t a fund we used but I wouldn’t panic over one poor year as I think some of this can be explained by the fund’s strong value style bias and also because it has a much higher exposure to large caps than some of its sector rivals, so you should expect it to go through periods of significant divergence from both the index and the peers. Mostly this divergence has been in excess returns, but more recently it has had a weaker run.”
“The fund has retained a larger weighting to oil & gas than some other income funds, though is underweight the index, and also has a top 10 position in Barclays, which has been under pressure of late. However, it’s the nature of value managers to target out of favour companies.”
The portfolio is currently overweight financials, with Aviva, Royal Bank of Scotland and HSBC joining Barclays in its top 10. Other major holdings include GlaxoSmithKline (its largest at 6.4 per cent of assets), BP, AstraZeneca and Tesco.
Schroder Income has a 0.91 per cent clean OCF and yields 4.23 per cent.
Stephen Message’s £201.9m fund has lost 8.26 per cent over the last 12-month period, following its sector leading gains over the previous three years. Under the tenure of the manager, however, the fund’s 86.06 per cent total return compares more favourably with the 76.11 per cent average gain in the IA UK Equity Income sector and the 55.61 per cent rise in the FTSE All Share.
Performance of fund vs sector and index under Message
Source: FE Analytics
Andy Parsons, head of investment research and advisory services at The Share Centre, said: “This is often the dilemma and can create some irrational investor behaviour.
“What people have to ask is 'has the manager changed his investment style' and it's clear here that he hasn't. Message has a very strong preference for financials, just shy of 40 per cent is in financials. When you look at that and know he has just under 9 per cent in oil & gas and 4.5 per cent in basic materials, you see he has been holding some sectors that are seriously under pressure over the past 12 months.”
“Message runs quite a high conviction portfolio, so he is a manager backing his beliefs in sectors which have done him well but have been out of favour more recently. What a manager has to evaluate is if they still see merit and value in the underlying businesses. Are they completely broken or is just that the market does not love them? When it comes to most of this fund's holdings, you'd have to conclude that the market doesn't love them at the moment."
The fund has one of the highest weightings to financials in the IA UK Equity Income sector through top-10 holdings such as Aviva, HSBC and Lloyds. It also has BP and Royal Dutch Shell within its biggest holdings, alongside Vodafone, AstraZeneca and GlaxoSmithKline.
Old Mutual UK Equity Income has a 0.90 per cent clean OCF and is yielding 4.44 per cent.
