After months of being out of favour amid Brexit uncertainty, UK-focused funds are back on track. Eight of the 10 best-performing funds in December were UK smaller companies funds, according to Morningstar Direct data.
The so-called Boris Bounce on the UK stock market following the Conservative's landslide General Election win boosted both the pound and the UK stock market, with the FTSE 250 briefly hitting an all-time high and sterling reaching its highest level in three years.
| Fund Name | Morningstar Rating | Morningstar Analyst Rating | Return (%) |
| Merian UK Smaller Companies Focus | 5 | Bronze | 9.4 |
| BlackRock World Gold | 4 | Bronze | 9.2 |
| Franklin UK Smaller Companies | 3 | Bronze | 8.8 |
| BGF Latin American | 3 | Neutral | 8.7 |
| Aberforth UK Small Companies | 2 | Neutral | 8.4 |
| ASI UK Smaller Companies Inst | 5 | Gold | 8.1 |
| Merian UK Smaller Companies | 3 | Silver | 7.9 |
| Artemis UK Smaller Companies | 4 | Silver | 7.9 |
| Liontrust UK Smaller Companies | 5 | Bronze | 7.7 |
| TB Amati UK Smaller Companies | 5 | Bronze | 7.4 |
| Source: Morningstar Direct |
The Bronze-rated Merian UK Smaller Companies Focus was the best performing fund in the month, delivering a return of 9.4%. It outperformed its benchmark, the FTSE Small Cap Index, by 7.8 percentage points in 2019 as a whole.
Morningstar analyst Samuel Meakin rates the fund's manager Nick Williamson, who has added some interesting micro-cap stocks into the portfolio since he took the helm in 2016, an area of the market where he sees significant potential upside. “This is an area where he tends to be sole holder and undertakes his own research," says Meakin. “Williamson has made a very strong start in terms of performance, as his micro-cap stocks and conviction behind certain team picks have proved correct.” The fund’s top holdings include specialist lender OneSaving Bank and online fashion retailer Boohoo.
Meanwhile, the Silver-rated Merian UK Smaller Companies and Gold-rated ASI UK Smaller companies returned 7.9% and 8.1% respectively in December – the two funds were also among the best performers in November.
Among the UK smaller companies funds that did well, the Bronze-rated Franklin UK Smaller Companies run by Richard Bullas, and the Neutral-rated Aberforth UK Small Companies funds, stand out – up 8.8% and 8.4% respectively in the month.
Both funds have a contrarian value style, investing in unloved UK stocks. It's been a difficult stance to hold in recent years, but Bullas thinks clarity over Brexit will help the outlook for this part of the market: “When we get some clarity with the political situation, the small-cap market will start to outperform, as confidence will come back to the UK market and investors start investing again."
Outside of smaller companies, the £4.2 billion BlackRock World Gold and £2.4 billion Blackrock Latin American funds make up the final two spots in the list of top performers.
There is less uniformity among the bottom performers, where the weakest performer was Bronze-rated Jupiter India, down 3.8%. Morningstar analyst Lena Tsymbaluk notes that ”the fund can go through short period of underperformance” because it favours mid- and small- cap names over benchmark heavyweights, but the fund has also suffered from general investors malaise towards the Indian stock market.
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Its fellow Silver-rated Stewart Investors Indian Subcontinent Sustainability fund was down 2.3% in the month. This concentrated portfolio of just 30 to 40 holdings can be more prone to bouts of volatility, with larger stakes in fewer stocks meaning poor performance by some can have strong repercussions on overall performance. Morningstar analyst Jan Nel, however, is optimistic the fund will beat its benchmark over a full market cycle, for investors who can bear the ups and downs along the way.
In a bad period for property, it is no surprise to see four open-ended property funds in the worst performers table. In December, the M&G Property Portfolio fund suspended trading sparking fears about the contagion risk for the rest of the sector and raising concerns about the appropriateness of illiquid holdings such as property in open-ended funds.
The Fidelity Global Property and the First State Global Property Securities funds – both Neutral-rated – were down 3.1% and 2.6% respectively for the month. Two passive options in the sector also found themselves in negatrive territory: the £2.8 billion iShares Global Property Securities Equity Index and L&G Global Real Estate index.
Elsewhere, the Baillie Gifford Worldwide Discovery and the Baillie Gifford Global Discovery funds, both Silver-rated, have fallen from grace, moving from the best performers list in November to the worst performers in December. Morningstar analysts say the two funds are risky options which are “not for widows and orphans”.
