MI Chelverton UK Equity Growth, CFP SDL UK Buffettology and Baillie Gifford UK Equity Alpha are some of the 30 active IA UK All Companies funds that outperformed over the past five years while taking big bets away from the market, research by Trustnet has found.
The 2015 to 2020 period has been somewhat of a rollercoaster for UK equities. Investors had to navigate the seemingly endless Brexit drama, its associated political uncertainty and then a devastating global pandemic.
The FTSE All Share made a 28.46 per cent total return over the period, meaning it underperformed many of its international peers. The S&P 500 rose 112.47 per cent in the same period, emerging markets were up 97 per cent while European and Japanese stocks gained around 60 per cent.
However, active managers have the potential to build portfolios that look different to the index and hopefully deliver higher returns. In this research, we tried to find UK equity funds that appear to have done just that.
Trustnet looked at the performance of all the funds in the IA UK All Companies sector over the period to single out those that delivered strong returns while also diverging from their benchmark. This was done by looking at tracking error.
Tracking error measures the consistency of excess returns – which can be an indication of how consistently a manager outperforms or underperforms the benchmark. The lower the tracking error, the closer the manager follows the benchmark; the higher the tracking error, the more the manager deviates from the benchmark.
The table below shows all the IA UK All Companies funds with a five-year performance record, narrowed down to those that outperformed by more than 10 per cent and had a tracking error above 7. It is ranked by their outperformance of the benchmark.
Funds that do not have a stated benchmark were assessed relative to the FTSE All Share, the most common benchmark in the sector.
Source: FE Analytics
Correlation (which measures the strength of the relationship between the fund’s performance and the benchmark), and R-squared (which measures to what extent the variance of the benchmark performance explains the variance of the fund performance) were also shown.
Of the 209 IA UK All Companies funds with data available and a five-year track record, the average tracking error was 6.85, while the average correlation was 0.91 and the average R-squared was 0.85.
The highest outperformer in the table is the £1bn MI Chelverton UK Equity Growth fund, run by James Baker. The strategy beat its benchmark - the IA UK All Companies sector - by a whopping 106.94 per cent.
The fund ran a high cash level going into 2020 and has benefitted from upping its exposure to technology during the March crash, however the manager favours more cyclical assets going forward.
The £1.5bn CFP SDL UK Buffettology fund was the next highest performer, beating its benchmark by 54.51 per cent.
Managed by FE fundinfo Alpha Manager Keith Ashworth-Lord, he aims to replicate the investment style of legendary value investor Warren Buffett, investing in companies with strong balance sheets and the ability to grow in the long run.
The £832m Baillie Gifford UK Equity Alpha fund was the next highest outperformer in the list, outperforming its FTSE All Share benchmark by 52.69 per cent.
The manager Gerard Callahan embraces the firm’s long-term investment approach to investing, with high conviction and extremely low turnover, holding 30 to 40 companies.
The £6.4bn LF Lindsell Train UK Equity fund also featured in the list. With a correlation of 0.785, it was on the lower end of correlations, and outperformed the benchmark by 30.65 per cent.
Manager Nick Train expressly aims to deviate from the FTSE All Share benchmark and takes a very concentrated approach - with his top three holdings in London Stock Exchange Group, RELX and Diageo, each amounting to almost 10 per cent of the portfolio.
Several mid-cap funds also featured in the list with high outperformance and high tracking errors. The £213m ASI UK Mid Cap Equity fund, the £3.3bn Merian UK Mid Cap fund, and the £63m Quilter Investors Equity 1 all deviated from the FTSE 250 (ex ITs) index and outperformed.
Several multi-cap funds also featured: the £274m Marlborough Multi-Cap Growth and the £414m Merian UK Dynamic Equity funds both invest heavily in medium and small-cap companies relative to the benchmark.
One value strategy made it to the list as an outperformer, namely the £462m Premier Miton UK Value Opportunities fund run by FE fundinfo Alpha Manager Andrew Jackson.
The fund seems to have successfully navigated a difficult period for value strategies and outperformed. Its largest three holdings are in Reach, NatWest Group and Jet2.
Not all funds with high trackers outperform and diverging from the index goes both ways: there were 13 active UK equity funds with tracking errors above 7 that underperformed by more than 10 per cent.
Source: FE Analytics
The £511m Jupiter UK Growth fund was the worst performer, posting a loss of 27 per cent for the five-year period, compared to the FTSE All Share’s 28.86 per cent total return.
Two value strategies were also amongst the worst underperformers. Although the £49m JPM UK Equity Value fund and the £178m L&G UK Special Situations Trust both posted positive returns, they failed to beat the FTSE All Share.
Despite a positive return of 23 per cent, the £181m Aegon UK Equity fund had a high tracking error but underperformed its IA UK Smaller Companies sector benchmark, which delivered a total return of 61.94 per cent for the period.