Markets are looking overheated – finding a bargain in UK equities is significantly harder that it was a few years ago. UK equity funds have seen a strong start to the year, after a difficult 2016. UK equity funds underperformed the market last year thanks to their underweight in energy stocks which led the market rally.
So how can investors find a good investment opportunity?
Morningstar fund analysts award a Gold, Silver or Bronze rating to funds which they think will outperform their sector peers over the medium to long term. This is not a buy rating – it is up to the investor to decide whether they would like to add a particular asset class or geographical exposure to their existing investments, but once that decision has been taken, analyst fund ratings highlight the best in show. A Gold rating denotes that the analyst has the highest conviction in the fund, followed by Silver and then Bronze.
A fund’s star rating indicates how it has performed in recent history compared to the peer group average. If a fund has a five-star rating it has significantly outperformed its peers, if it has a one-star rating it has significantly underperformed.
All things being equal, medallist funds should be five-star rated. If they have had a period of underperformance, this could be a good opportunity for long-term contrarian investors.
Using Morningstar’s free Fund Screener, we have identified three of these funds – highly rated, but performing below par. They have a Gold analyst rating, but only one or two stars. If you are looking for an investment in these sectors, these could be a worthy addition to your portfolio.
AXA Framlington UK Select Opportunities
AXA Framlington UK Select Opportunities features a consistency of management and approach that, in our opinion, makes it a strong offering in its sector, says Morningstar analyst Simon Dorricott.
Nigel Thomas has run this fund since joining Framlington in 2002 and employs a similar strategy to the one that served him well on his former mandates at ABN AMRO Asset Management, now part of Artemis.
He is supported by a team of UK portfolio managers including multi/mid-cap manager Chris St. John, his backup on this fund, together with a long list of contacts he has used throughout his career. Although Thomas clearly uses inputs from colleagues, this portfolio is undoubtedly a reflection of his own investment views.
Fidelity MoneyBuilder Income
We have a high opinion of lead manager Ian Spreadbury and comanager Sajiv Vaid, given their backgrounds and long-term portfolio management experience, says analyst Carlos Lucar.
Spreadbury has been at the helm since inception, and his presence underpins our conviction. He has gained valuable perspective through his long tenure at Fidelity, his 10 prior years at L&G, and his earlier actuarial career. Having built the team at Fidelity in the 1990s, he is able to get the most out of the analyst team. He also designed the investment process, which remains in place.
The long-established investment process is driven by the managers’ top-down views, while they rely heavily on Fidelity’s well-resourced multidisciplinary research platform for bottom-up idea-generation and execution.
Veritas Global Equity Income
A major strength of this fund is its management, says analyst Muna Abu-Habsa. Charles Richardson and Andrew Headley, who previously worked together at Newton, have been at the helm since the fund’s launch in 2006 and have run the institutional version since 2003.
Richardson leads on this fund while Headley leads on the Veritas Global Focus fund. They benefit from the support of an experienced team of six analysts, whose research is instrumental to the portfolio.
The real-return focus has generally driven the fund to strong returns in different market environments. Although performance between 2013 and 2015 marked a challenging period for the fund, returns have since returned to form and the fund's strong risk/return profile since launch has remained intact.
As bond yields have dropped sharply in recent years and investors have increasingly sought yield from equities, most income stocks have become too richly valued, in the managers’ views. Given their focus on absolute valuations, this has reduced the investable universe and subsequently the number of stocks in this portfolio, therefore also increasing stock-specific risk.
