It is clear that 2016 – so far – has ushered in a significant change in equity market dynamics. 
Investors will have no doubt realised that some of the previously most hated areas of the market – gold, energy and emerging markets – have come rallying back in recent months while dependable outperformers – including the likes of biotechnology and smaller companies – have been left behind.
This reversal has had a profound effect on the Investment Association’s UK equity sectors, with many of 2015’s worst performers now finding themselves way ahead of their peers and the FTSE All Share in the first five or so months of the year. These include Schroder Recovery, GAM UK Diversified and Elite Charteris Premium Income.
When you look at a selection of the best and worst performing FTSE sectors so far in 2016 as well as the difference in returns between smaller and larger UK stocks, it makes sense why the peer groups have largely been turned on their heads.
Performance of indices in 2016 and 2015
Source: FE Analytics
Indeed, two of the only areas to have continued either their good or bad run in 2015 so far this year are tobacco and financials.
Therefore, it comes as little surprise that some of the sector-topping funds on a medium to long-term basis have been hit harder than most year-to-date. In this article, we highlight five funds from the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sector that were top quartile last year but are sitting on bottom quartile losses so far this year.
It must be noted, of course, that five and a half months is a very, very short period of time to judge a fund and there is no evidence to suggest this is the start of any long-term decline.
CF Miton UK Value Opportunities: -5.53% in 2016
We start off with one of the darlings of the IA UK All Companies sector, though its uncertain future is why it has featured in the press so prominently over recent months.
Under the stewardship of Georgina Hamilton and FE Alpha Manager George Godber and their distinctive value approach, the £590m CF Miton UK Value Opportunities fund has been the peer group’s fourth best performer since its launch in March 2013 with gains of 56.20 per cent – some 44 percentage more than the gains of the FTSE All Share.
Performance of fund versus sector and index since launch
Source: FE Analytics
Those figures include top decile numbers in 2014 and 2015, meaning it is one of the best performers in terms of its Sharpe ratio and maximum drawdown since inception.
The managers focus on value but have stringent safety checks before buying an out-of-favour stock. On top of that, though it is a multi-cap offering, the managers have tended to shy away from the FTSE 100.
These two dynamics have hindered the fund in 2016 so far, with perceived low quality value stocks leading the index and smaller companies underperforming large-caps. All told, it means the fund is firmly bottom quartile year-to-date with losses of 5.53 per cent.
This has also come at a time when Hamilton and Godber have announced their departure from the fund, though as FE Trustnet highlighted yesterday, Miton has now found a replacement in former EdenTree manager Andrew Jackson.
Neptune UK Mid Cap: -4.87% in 2016
Another firm favourite within the IA UK All Companies peer group, FE Alpha Manager Mark Martin’s four crown-rated Neptune UK Mid Cap fund currently finds itself in the bottom quartile and behind its benchmark in 2016 so far.
Since its launch in December 2008, though, the £611m fund has been a top decile performer and beaten the FTSE 250 ex IT index by more than 50 percentage points. It has also delivered top decile risk-adjusted returns and annualised volatility.
Martin assembles his portfolio using three ‘silos’ – economic recovery, structural growth and corporate turnarounds – and will hold at least 20 per cent in each area at any one time. This means the fund has tended to lag narrowly in strongly rising markets, but comfortably beat the index and sit at the top of the performance tables in falling ones.
Therefore, it is fair to say Neptune UK Mid Cap’s recent underperformance is somewhat uncharacteristic.
Martin points out, however, that while he has had some individual stock disappointments, his approach has been caught out by investors turning their backs on defensive growth companies which have led markets over recent years.
“Undoubtedly, there has been a move in the market to take money out of profit centres and momentum as a style factor has begun to wear off. Clearly, the fund does have a few momentum names – reasonably high quality companies – which have performed well,” Marin said earlier this year.
CF Woodford Equity Income: -5.06% in 2016
This fund needs little introduction. Indeed, most that has been written or said about FE Alpha Manager Neil Woodford’s £8.7bn portfolio has been in relation to its stellar returns since its launch two years ago.
FE data shows that since inception in June 2014, CF Woodford Equity Income has been the best performing IA UK Equity Income fund with returns of 17.93 per cent. The FTSE All Share has lost 1.04 per cent over that period.
Performance of fund versus sector and index since launch
Source: FE Analytics
Though the star manager has seemingly been able to transition from Invesco Perpetual to his start-up and continue is enviable track record with relative ease, the falls in the healthcare and biotech space as well as losses from telecoms and insurers have hurt Woodford this year.
It is largely his big positions in tobacco companies that have offset further losses.
That being said, his former Invesco Perpetual income funds – which are now run by his former colleague Mark Barnett – are also underperforming their sector and the index in 2016 following a good 2015, which suggests it is more the investment style falling out of favour rather than anything else.
Standard Life Investments UK Equity Income Unconstrained: -6.65% in 2016
Neither Woodford nor Barnett have posted losses in 2016 as great as Thomas Moore, however, with his popular Standard Life Investments UK Equity Income Unconstrained fund currently the second worst performing IA UK Equity Income fund in 2016.
Again, Moore has built up a loyal following thanks to his strong track record since becoming manager in January 2009. Many praise his differentiated approach to the market as well – a strategy that revolves around value investing and a focus on dividend growth rather than a high starting yield.
Since he has been at the helm of this five crown-rated fund, it has been a top decile performer and more than doubled the gains of the FTSE All Share. On top of that, it has outperformed in each calendar year (except the falling market of 2011) and never cut its dividend.
While Moore’s approach has meant Standard Life Investment UK Equity Income Unconstrained has tended to avoid some of the most popularly-held dividend stocks – a process which has worked well given mid and small-caps have outperformed mega-caps over the medium term – it has had the opposite affect more recently.
However, a bias towards mid-caps has had a negative impact on the fund year-to-date as well as his holdings in telecoms and insurers, which have come under pressure.
Franklin UK Smaller Companies: -6.23% in 2016
Turning to the IA UK Smaller Companies sector now and one of the only top-performers to be left behind in 2016’s market turnaround has been Franklin UK Smaller Companies – which itself has seen a change in fortunes over the medium term.
Indeed, prior to Richard Bullas and Paul Spencer’s appointment as managers in June 2012, the five crown-rated fund regularly featured in the peer group’s bottom quartile thanks to some sharp drawdowns and slow recoveries.
Since they have been at the helm, though, Franklin UK Smaller Companies has been a top quartile performer and comfortably ahead of its benchmark with returns of 95.03 per cent. As a result, it has started to receive inflows with the AUM increasing by more than 12 times over three years.
Performance of fund versus sector and index under Bullas & Spencer
Source: FE Analytics
Bullas and Spencer’s first move after taking over the portfolio was to make it more concentrated and increase its underlying quality – with the managers favouring companies demonstrating growth and decent cash generation.
This strategy has clearly worked over the medium term, but as it has been the lower quality, more cyclical names that have led the UK market since its lows in February, Franklin UK Smaller Companies has been unable to recover from its initial losses.