Few investors look back on 2018 fondly, after the Federal Reserve’s tightening of monetary policy and the escalation of US-China trade hostilities led to a disappointing end to the year from a market perspective.
It was doubly hard for domestic equity investors who tangled with uncertainty ahead of a planned withdrawal from the EU, the UK’s largest trading partner.
And it proved especially difficult for active managers in the UK equity space as the FTSE All Share index outperformed both the IA UK All Companies and IA UK Equity Income sector averages.
As the below chart shows, the average IA UK All Companies fund was down by 11.19 per cent while the IA UK Equity Income sector fared little better, underperforming the FTSE All Share (which was down by 9.47 per cent) with a loss of 10.54 per cent.
Performance of sectors vs indices in 2018
Source: FE Analytics
While IA UK Smaller Companies managed to outperform the Numis Smaller Companies + AIM Excluding Investment Companies index – a commonly used benchmark for small-cap strategies – the average fund in this sector was down by 11.7 per cent.
The UK equity market has rebounded strongly in 2019, however, as sentiment towards risk assets strengthened at the beginning of the year.
While the prospect of a ‘no deal’ Brexit remains a strong possibility, the FTSE All Share has made a total return of 11.12 per cent to 31 August.
As such, FE Trustnet decided to look at those UK equity funds that fared the poorest in 2018 but have turned it around in 2019.
Of the 64 IA UK All Companies funds with a fourth-quartile performance in 2018, just 12 have managed to bounce back with a top-quartile return in 2019, so far (to 31 August).
From our study, the worst performing bottom-quartile fund of 2018 was Allianz UK Mid Cap, which recorded a 22.62 per cent loss.
So far this year the £43.3m mid cap-focused fund – overseen by Andrew Neville – has made a total return of 17.63 per cent.
One of the strongest performers from last year’s bottom-quartile performers is Marlborough UK Multi-Cap Growth, which – having made a loss of 17.39 per cent in 2018 – has returned 19.3 per cent in 2019, so far.
Source: FE Analytics
The £280.2m fund, which invests up and down the market capitalisation scale, has been managed by FE Alpha Manager Richard Hallett since August 2005.
Hallett typically invests in a concentrated portfolio of companies that are among the leaders in their particular business sector, regardless of size, and with a sustainable competitive advantage, allowing them to continue growing in challenging market conditions.
“The continuing outperformance of the fund is the result of the identification, selection and investment of corporate secular growth opportunities,” noted Hallett recently.
“In particular, whilst it is true that all corporates remain vulnerable, to an extent, to the slowdown currently being experienced in a number of global markets, secular growth companies should outperform more developed businesses growing their corporate earnings at a slower pace.”
Several IA UK Equity Income funds bounced back from bottom-quartile numbers in 2018 – although not as many as in the larger IA UK All Companies sector.
Data from FE Analytics shows that three funds out of 21 bottom-quartile performers from the IA UK Equity Income sector last year have made a top-quartile return in 2019.
In our study, TB Guinness UK Equity Income was the worst performing fund from the sector, having made a loss of 17.73 per cent last year.
The minnow equity income fund has made a total return of 12.73 per cent and, as such, has also produced the strongest return from the sector so far this year.
Source: FE Analytics
As the above table shows, it was joined by the £1.1bn M&G Dividend fund – managed by Michael Stiasny and James Taylor – and the £600.9m four FE Crown-rated Unicorn UK Income fund – overseen by FE Alpha Manager Fraser Mackersie and co-manager Simon Moon.
Four funds from the IA UK Smaller Companies sector bounced back strongly in 2019 after a bottom-quartile year.
The £165.2m Threadneedle UK Smaller Companies fund was the poorest performer from last year to make a top-quartile return in 2019.
Source: FE Analytics
It made a loss of 20.67 per cent last year but has made a 12.94 per cent return in 2019, to 31 August.
Manager James Thorne seeks out “the industry leaders of tomorrow” to build a diversified portfolio capable of delivering strong and consistent returns over the long term.
The best performing fund of last year’s bottom-quartile performers is the £264m Kames UK Smaller Companies vehicle, overseen by Elaine Morgan, which made a loss of 16.12 per cent in 2018 but has made a total return of 15.24 per cent this year.