Troy Asset Management’s Francis Brooke, GVQ Investment Management’s Jamie Seaton and Schroders duo Nick Kirrage and Kevin Murphy are among the long-term outperforming managers struggling in 2017, according to the latest data from the FE Trustnet.
This year has been a good one for active managers, with the average funds in the IA UK All Companies and IA UK Equity Income sectors returning 2.56 and 0.12 percentage points more than the FTSE All Share.
This is in stark contrast to 2016, when the market outperformed both sectors as active managers were caught out by the return to favour of value stocks.
However, while the average active manager has outperformed this year, there are some notable names in the list of laggards.
Below we look at some of the best long-term managers running UK equity funds that have had a poor year so far.
Previous articles focused on the long-term underperformers in the multi-asset and global sectors that have outperformed so far in 2017, as well as the top managers running regional equity funds that have outperformed over the last decade but have struggled year-to-date.
Trojan Income – Francis Brooke
The largest name on the list is the £3.2bn Trojan Income fund run by FE Alpha Manager Francis Brooke.
The five FE Crown-rated fund was a top quartile performer in 2014 and 2015 and made second quartile returns last year – though it still lagged the All Share index.
This year it has struggled to match this strong performance and is set for its first bottom quartile return in a calendar year since 2013, as the below chart shows.
Performance of fund vs sector and benchmark YTD
Source: FE Analytics
However, the fund has an extremely strong long-term track record, returning 124.51 per cent over the past 10 years – the fifth-best performance of the 55 qualifying funds in the IA UK Equity Income sector.
So far this year the market has been led higher by growth stocks as the value trade has fallen back after a strong run in the second half of 2016. As such, the fund’s 24 per cent weighting to financials and 9 per cent weighting to oil & gas companies (among other contrarian trades) have hampered returns.
The portfolio remains on the FE Invest Approved list, however, with the analysts noting: “Brooke says that the fund is a bit boring, which is not a problem if it means steady returns and low volatility.
“He does not look for tremendous performance in market rallies, but is more concerned about preserving investors’ capital in real terms, adjusted for inflation – a foundation of Troy’s investment process.
“On the income side, the payout is in line with the sector’s average and keeps growing in UK sterling terms. The only worry would come from a change in the global economic climate, as the manager would not alter his stance to benefit from a strong recovery.”
Trojan Income has a yield of 3.76 per cent and a clean ongoing charges figure (OCF) of 1.02 per cent.
Schroder Recovery, Income and Specialist Value UK – Nick Kirrage and Kevin Murphy
Schroders FE Alpha Manager value investing duo Nick Kirrage and Kevin Murphy also make the list, having struggled this year in three funds.
The £1.1bn Schroder Recovery and £86m Specialist Value UK Income funds have made bottom quartile returns in the IA UK All Companies sector so far this year of 4.55 and 2.45 per cent, respectively.
Meanwhile the £2bn Schroder Income fund has performed slightly better, returning 5.21 per cent – though this places it in the bottom quartile of the IA UK Equity Income sector.
The portfolios have performed poorly this year having significantly outperformed in 2016 as the value investing style has gone from en vogue to heavily out of favour over the last 18 months.
Performance of indices since Q1 2015
Source: FE Analytics
As the above chart shows, the MSCI United Kingdom Value index had three strong quarters in 2016 relative to the MSCI United Kingdom Growth index but this trend reversed in the first quarter of 2017.
However, managers Kirrage and Murphy have proven to add value over the long-term, as despite the style being out of favour for a long time, all three funds named above have been top quartile performers over the last decade.
Speaking on Schroder Recovery, analysts at Square Mile said: “As a strategy focused on companies that have fallen foul of investor sentiment, this is clearly not a fund for the fainthearted.
“However, in our opinion, one of the characteristics that stands this fund in good stead is that the managers clearly have a sound appreciation of the dangers that this type of investment can entail.
“Furthermore, they understand the importance of having a committed approach and closely adhering to the investment process. As such the managers truly invest with a style that the fund's name would suggest; bringing both the potential for outsized returns but also the accompanying elevated risk levels.”
All three funds are run with similar mandates with overweight positions in financials, consumer services stocks and basic materials companies.
Schroder Recovery has a yield of 2.08 per cent and an OCF of 0.91 per cent. Schroder Specialist Value UK has a yield of 2.84 per cent and an OCF of 0.78 per cent. Schroder Income has a yield of 3.32 per cent and an OCF of 0.91 per cent.
Third up is the £359m GVQ UK Focus fund, run by FE Alpha Manager Jamie Seaton since 2009.
The fund has made 150.81 per cent over the last 10 years – a top quartile return in the IA UK All Companies sector.
When he took over the fund, which had been underperforming under previous manager Adam Steiner, Seaton switched from a smaller companies focus.
Now the manager uses a private equity approach to investing in public markets by focusing on four key drivers: earnings growth, re-rating, de-gearing and corporate activity.
He believes public equity managers tend to only focus on the first two drivers and private equity managers on the latter two, so he should be able to combine these techniques to maximise growth potential.
As such, Seaton is happy to hold companies that are underperforming if he thinks the market’s assessment of their long-term value is wrong.
However, he does not buy value for the sake of it and so has avoided traditional value areas such as banks, miners and oil & gas companies – a good place to have steered clear of for much of the last decade.
The portfolio is among those approved by FE Invest with analysts noting: “The fund’s excellent performance has coincided with the management of Jamie Seaton.
“Seaton and his deputy Jeff Harris look to incorporate the latest research into what works in private equity investing.
“The focus on cashflow for valuation is a superior approach to the usual focus on the income statement and earnings-per-share figure, which are far too easily manipulated by companies to be reliable.”
However, they added that “investors should be aware that the sector biases of the fund have been a huge help and will not always be so” as demonstrated this year.
Performance of fund vs sector and benchmark YTD
Source: FE Analytics
Indeed, the portfolio, which holds healthcare giant Shire (10.4 per cent), marketing firm WPP (9.2 per cent) and asset management firm Aberdeen Standard Life (8.5 per cent) in its top three, has underperformed this year, returning 3.33 per cent.
GVQ UK Focus has a yield of 2.41 per cent and an OCF of 1.01 per cent.
Finally, Majedie UK Focus is on the list having returned 4.48 per cent so far in 2017 – one of the lowest returns in the IA UK All Companies sector.
The £848m fund has been run by Chris Field and James de Uphaugh since 2003 with Matthew Smith joining in 2010 and FE Alpha Manager Chris Reid added in 2012.
Over the last decade the fund has returned 145.99 per cent – a top quartile performance, while over five years – the time since Reid was added – it has made 81.62 per cent.
Performance of fund vs sector and benchmark under manager tenure
Source: FE Analytics
Reid previously managed Majedie Asset Management Tortoise and he is also co-manager of the Majedie UK Income fund.
The managers of Majedie UK Focus are not afraid to be contrarian, hunting up and down the market cap spectrum for ideas, and are unafraid to back maligned sectors.
As such, UK supermarkets and oil majors – two industries that have been deeply out of favour over the last few years – make up 31 per cent of the portfolio.
Oil giants BP (9.4 per cent) and Shell (5.9 per cent), supermarket chain Tesco (6.5 per cent) and British Gas owner Centrica (5.3 per cent) are the top four holdings in the fund.
Damian Barry and Tony Lawrence, who run the 7IM multi manager funds, noted: “For us, this has been a buy-and-hold that has served us well, whatever the weather.”
The fund has a yield of 1.65 per cent and an OCF of 1.52 per cent.