Saunderson House’s weightings to quality, defensive areas of the market are at the lowest they have been for a significant amount of time, according to Ben Williams (pictured), who believes a long overdue equity market rotation is on the cards. 
The investment manager at the firm says he is seeing the best UK opportunities within the recovery space at the moment and has been increasing exposure here since the middle of last year.
He then added further to bombed-out value funds at the start of this year, despite the fact that quality defensives have significantly outperformed value plays year-to-date as well as over the last few years.
“Anecdotally you hear that your value guy has been fired because he’s been performing badly over the past year and they’ve just given the money to the quality growth guy sitting next to him because he’s done so well. These sorts of things make us want to hold more of a bias towards beaten up recovery holdings,” he said.
“It’s very rare that we’ll sell a manager just because a fund is underperforming. It’s generally the other way around, we usually just try to take a bit of profit when they’ve done well and back them when they’ve done badly - it’s only if they start changing what they do after they’ve underperformed that we will get annoyed and sell.
“But, if they stick to exactly what they’re doing, we’re quite happy to keep on backing them.”
In the below article, the investment manager highlights five UK funds that have struggled during recent times but he believes are worth holding onto as longer term plays.
The one crown-rated Jupiter UK Growth fund has been headed up by Steve Davies since 2013 and, over this time frame, it has performed broadly in line with its sector average and has outperformed its FTSE All Share benchmark by 3.54 percentage points with a total return of 39.3 per cent.
Year-to-date, however, the fund has fared less well, having lost 11 per cent compared to the All Share’s return of 9.69 per cent and its average peer’s return of 4.9 per cent.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
The £1.4bn fund, which has a concentrated portfolio of 44 holdings, consists of two investment buckets – one is areas of the market that Davies has a positive view on and the other is areas that are faring less well that could be set to recover over the medium term.
While the fund is able to invest across the cap spectrum, it tends to have more of a bias towards large and mid-caps than it does small-caps, holding the likes of Lloyds, Legal & General and Barclays in its list of 10 largest positions.
“We’ve had clients come in and ask where they should be buying and this is certainly one fund we’ve been telling people to buy because it’s been beaten up on both sides. You have the UK consumer and retailers in there and then its recovery bucket - which is about a third of its portfolio - is heavily invested in banks,” Williams said.
“He hasn’t held many oil & gas stocks and banks have struggled as well so he’s had a double whammy, but we have a lot of time for Steve Davies. We think he’s very good.”
Jupiter UK Growth, which his in the bottom quartile for its annualised volatility, maximum drawdown (the most money and investors could have lost if bought and sold at the worst possible times) and Sharpe ratio (which measures risk-adjusted returns) over the manager’s tenure, has a clean ongoing charges figure (OCF) of 1.02 per cent and yields 1.7 per cent.
The one crown-rated Franklin UK Mid Cap fund is £882m in size and has been run by FE Alpha Manager Paul Spencer since February 2006.
The fund has achieved significant returns over five and 10 years, having almost tripled the performance of its sector average over the last decade with a total return of 230.21 per cent.
However, it is in the bottom quartile over the last year, having lost 6.04 per cent while both its FTSE 250 benchmark and average peer have achieved positive total returns.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
“At the beginning of the year, [Spencer] was maybe 55 per cent weighted in UK domestics and 45 per cent overseas, although these weightings have since flipped. Not because of the vote, but because he saw that a lot of domestic stocks had had a good run and were looking a bit more expensive. He was seeing better value overseas,” Williams explained.
“This did help but a lot of the FTSE 250 stocks got sold off so he was hit by that. We’ve held him for a number of years. We like the Franklin team, we have their UK Rising Dividends fund on our list as well and we like how they work.”
Spencer holds a concentrated portfolio of 36 stocks including the likes of Victrex, Rathbones and Dechra Pharmaceuticals.
His stocks are initially filtered using a broad top-down framework and are then chosen using bottom-up stock selection, with a focus on whether the company has sustainable growth prospects and attractive valuations.
Over the last five years, the fund is in the bottom quartile for its maximum drawdown and annualised volatility but is nevertheless in the second quartile for its Sharpe ratio thanks to its strong outperformance.
Franklin UK Mid Cap has a clean OCF of 0.82 per cent and yields 1.71 per cent.
Saracen UK Alpha
Formerly called Saracen growth, Craig Yeaman’s £23m fund is one of the smaller investment vehicles that Saunderson House holds in its portfolios.
“It used to be between £200m and £250m back in 2008 but it had a particularly bad time during the financial crisis – it was probably a bit too concentrated in some of its holdings – stocks like Weir Group hurt its performance,” Williams explained.
“It has been struggling slightly in terms of getting assets since then and the firm is just not as well-known as some others.”
“Its performance was in the first quartile over one, three, five and 10 years before Brexit. We’re quite happy to put funds on that are £30m or £25m, so long as we can see them growing. In fact, we’re much happier buying smaller, nimbler funds.”
Following bottom-quartile returns over one year as well as over three and six months, Saracen Growth is now in the second quartile for its returns over three and five years.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
Like the aforementioned funds, the two crown-rated investment vehicle has a concentrated portfolio of just 31 stocks. The fund’s largest weighting is in small-caps and its smallest weighting is in large-caps – its list of top 10 holdings features RPC, Gleeson and Berkeley Group.
Saracen UK Alpha has a clean OCF of 1.27 per cent and yields 1.5 per cent.
On an annualised basis, the two crown-rated Schroder Recovery fund was the worst performer in its sector last year, having lost 12.74 per cent. Williams says that this was an indicator that it was a good time to buy into the fund as the managers staunchly retain their philosophy and Williams points out their investing style will fall back into favour.
“They never change what they do which is good, because Schroders are happy to accommodate that. You might not get that in other fund management houses, they’ll get pressure from the guys above them to start buying things that they shouldn’t,” the investment manager explained.
“With this fund in particular, the marketing team has been quite good at getting the right investors in at the right times. They will say when it’s a good time to buy and when it’s not so much of a good time to buy and the managers probably say that as well.”
“When they strongly outperformed in 2014 and they were top of the pops over three and five years, they were saying that then wasn’t the best time to be buying and that they’d done a bit too well. I like that in a fund group.”
The £688m fund has been headed up by Kevin Murphy and Nick Kirrage since 2006 and, over this time frame, it has outperformed its sector average and benchmark by 61.92 and 60.06 percentage points respectively.
Performance of fund vs sector and benchmark under Kirrage and Murphy
Source: FE Analytics
Given the fund’s deep value-based approach though, this hasn’t always been a smooth ride – it is in the bottom quartile for its annualised volatility over the same time frame and is in the bottom quartile for its annualised returns during three out of the last 10 years. That said, the 40-stock fund still has a better-than-average maximum drawdown and Sharpe ratio over the managers’ tenure.
Schroder Recovery has a clean OCF of 0.92 per cent and yields 2.1 per cent.
