In sterling terms investors in the UK equity market had a tough time in 2016, with significant underperformance shown by the FTSE All-Share Index versus the MSCI AC World Index. Looking at sector returns for the year, the UK unsurprisingly followed world markets, with basic materials and oil and gas leading the way. 2017 has seen some reversals with those sectors that did well in 2016 struggling this year, and vice versa.
What does this all mean for UK equity fund performance? The obvious change has been in terms of market-cap, with small-and mid-caps outperforming and pushing these categories to the top of the performance tables in 2017.
Top Performers Over 3 Years
The Old Mutual UK Smaller Companies Focus fund has produced exceptional returns over the past three years, with a significant part of these being attributable to the current manager Nick Williamson. Williamson became lead manager in January 2016 having previously been deputy manager to Dan Nickols who leads the mid- and small-cap team. Williamson is managing the fund using the established team approach which combines top-down and bottom-up inputs. Debate is important throughout the process.
The team divide stock research between them, and new idea-generation from these sector specialists is key to the success of this fund. Although there is a significant team-based element to the process, there is still ample opportunity for individual managers to exert their own influence on portfolios based on stock selection, weightings, and nuances in overall positioning.
In addition, the relatively limited AUM in this fund has allowed Williamson to add some interesting micro-cap stocks where he sees significant potential upside. He is also willing to be a little more active than colleagues in reacting to shorter-term price moves. This is Williamson's first lead manager role but he has had a dream start as his micro-cap stocks and his conviction behind certain team picks have proved correct. This short tenure means the fund holds a Morningstar Analyst Rating of Neutral at the current time.
Another strong performer is the Liontrust GF Special Situations fund. This fund is managed to the same strategy as the UK domiciled Liontrust Special Situations fund. It is managed by Anthony Cross with support from Julian Fosh; each brings over 20 years of industry experience. The process dates back to 1997 and is based on Cross’s proprietary research, which has continued to be updated and refined since he joined forces with Fosh in 2008.
The managers’ skill sets complement each other: Fosh brings experience in large-cap UK stocks, while most of Cross’ career has centred on small- and mid-cap stocks. The process focuses on the importance of the intangible assets of a company, emphasising intellectual capital, distribution channels, and repeat business. This distinctive process has been applied consistently since launch. The process typically leads the fund to have a natural tilt toward the less capital-intensive businesses, such as support services, technology and media.
Most Popular Funds by Size
The largest funds in the sector all have relatively manageable assets under management, with most well-below $1 billion.
The JOHCM UK Growth fund holds a Morningstar Analyst rating of Silver. Mark Costar has run the fund since its launch in late 2001 and he is supported by Vishal Bhatia, whom he hired in August 2007. The manager focuses on finding undervalued, undiscovered, and mispriced growth opportunities. This can result in investments across the value-growth style spectrum, as long as the manager believes that a company’s growth potential is underappreciated by the market. The bottom-up approach relies on rigorous analysis of companies to build a thorough understanding of their prospects, risks, and opportunities.
The approach gives the fund a contrarian tilt, and over recent years there has been an underweight to mid-cap stocks, with exposure focused on the large- and small-cap segments of the market. The mandate is unconstrained and may show significant deviations relative to the FTSE All-Share Index.
Majedie Asset Management UK Equity is managed in a similar fashion to the UK domiciled fund of the same name. That fund holds a Morningstar Analyst Rating of Bronze. The fund is unusual as it is an amalgamation of four sub-portfolios; three large-cap sub-portfolios accounting for 30% of the fund each; and one small-cap portfolio. Each manager is given the freedom to run their sub-portfolio as they deem appropriate; however, the common philosophy among them is the desire to be pragmatic and flexible, and as such they seek to buy shares with the highest upside potential.
The team’s macro assessment shapes the sub-portfolios and can lead to some thematic biases in the fund. The strategy has been managed by James de Uphaugh and Chris Field since launch. They were joined by Matthew Smith in 2010, and Richard Staveley in 2013. The consistency of returns across different market environments is impressive.
Old Mutual UK Dynamic is managed by Luke Kerr who has been at Old Mutual since 2001. He is part of the mid- and small-cap team and draws on the team approach that looks to combine bottom-up stock research with top-down views concerning economic conditions and the outlook for specific industries. Kerr’s fund is a differentiated not only by focusing on small- and mid-caps, and largely excluding FTSE 100 names, but also through the use of short positions. The fund will always be net long, but the extent of this will vary according to market conditions and the availability of stock opportunities. Leverage will be limited to 130% gross exposure.
