The UK Mid-Cap Equity category contains a mix of approaches, with some funds focusing purely on mid-cap companies, while others invest in equities of all sizes, thus leading to a mid-cap profile. This differing focus of funds in the category can, and often does, lead to a wide dispersion in returns.
Morningstar defines mid-cap companies as those stocks that fall between the 70th and 90th percentiles of market capitalization (i.e. large-cap are the top 70% of market capitalisation while small-caps are the bottom 10% of market capitalisation). This segment of the market has been a very strong performer over the last few years, with the median fund in the UK Mid-Cap Equity category returning 16.74% per annum over the three years to 22 October 2007. This compares with 18.32% per annum for the median small-cap fund and 15.00% per annum for the median large-cap fund over the same period.
Clearly, funds in the UK Mid-Cap Equity category that avoid the large-cap space have had a favourable tailwind, and this shows up when looking at the funds at the top of the performance table over that three year period - funds like Old Mutual UK Select Mid Cap (27.79%) and Rensburg UK Mid Cap (27.03%) - which don’t invest in large-caps, sit on the top. This is not to say that these funds have just gotten lucky. In Ashton Bradbury, Old Mutual have a gutsy manager who is not afraid of positioning his portfolio very differently to the benchmark, and who has demonstrated a strong track record over many years of successfully executing his strategy. A big overweight in industrial materials has paid dividends in recent times. For investors looking for a pure mid-cap play, this is one of the best choices. We just question whether now is the best time to be adding to pure mid-cap exposure given the strong run that part of the market has had over the last few years, with valuations arguably now looking stretched.
This brings us to the all-cap offerings in the category. Typically these funds benchmark themselves against the FTSE All Share index and have a sizable exposure to large-caps relative to the small- and mid-cap focused funds. Accordingly most all-cap funds haven’t performed as well as their mid-cap category peers over the last 3 years as large-caps have generally lagged in a relative sense.
The best all-cap performer was JP Morgan UK Dynamic Fund (22.88%), whose focus on value and momentum put it in the sweet spot of the market over the last few years. We wouldn’t advocate investing here at this stage though, as portfolio manager Ajay Gambhir departed in March 2007, and that type of momentum-focused strategy can also have difficulties in more volatile times, as its lacklustre 2007 YTD performance has shown.
Another prominent fund in this category is Fidelity Special Situations. Its performance over the past three years was a more than acceptable 17.91% per annum, as renowned portfolio manager Anthony Bolton found more and more opportunities further up the market-cap spectrum, giving the portfolio a distinct large-cap flavour. While the long-term track record of this fund is unquestionable, the impending retirement of Bolton means we’re hesitant to recommend buying in just yet (click here for our full analysis of the management change).
One poor relative performer over the last three years that may be worth a look is Liontrust First Income. Long-tenured manager Jeremy Lang’s dual-pronged strategy of buying either beaten-down deep value opportunities or stocks with attractive yields relative to the long-dated gilt yield tends to result in steadier performance over time. This means it usually trails the market in giddy times like the last few years, but preserves capital during more turbulent market environments like the bear market of 2001, when this fund beat the FTSE All Share index by a whopping 26.80% for the year. When the market enters a more jittery phase, this fund would be a sound place to be in the mid-cap category.
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