g=en-GB&Category=EUCA000552&Universe=FOGBR%24%24ALL&IncorAcc=1%7c1">Morningstar UK Large-Cap Value equity
category. In fact, management is willing to let substantial sector biases build if they are justified by their valuation work.The current portfolio reflects this independent mindset. For instance, the team began selling down materials in late 2006 on grounds of stretched valuations, even as other managers chased that sector’s momentum. Similarly, it has recently been adding to consumer facing sectors and financials off the back of strong price weakness and valuation anomalies. Examples of new entrants in the portfolio and topping up of existing positions include the depressed Royal Bank of Scotland and Persimmon, both of which are have been beaten down recently.
Because the portfolio often looks different from the competition, its performance often looks out of step with the market. That’s particularly evident in its recent performance, owing partly to management’s early decision to cut back the fund’s exposure to materials stocks, which still look good on a year-to-date basis but have lost ground in the last three months to August 2008. On a year-to-date basis through August 31, 2008, the fund has lost over 14.8% and trails 78% of its category peers. Performance would have been even worse had the team not cut back its financials exposure sharply over January to August 2007. Despite the appreciable reduction, the financials weighting was still above the category average when the credit crisis struck in mid-2007. That and the materials underweight have tarnished the fund’s three-year record (third quartile) and weakened its five-year numbers (low second quartile). But management isn’t rattled by its near-term underperformance. They are an experienced, stable, and successful team willing to stick to their knitting even when times get tough.
We admire such discipline, but management’s job is made more difficult by this fund’s high costs. With a total expense ratio of 1.94% - up from an already high 1.83% in 2007 - this fund is amongst the most expensive in its Morningstar category. That’s a substantial hurdle for this fund’s managers to overcome. Granted, the fund’s low turnover (which ranges from 25%-35%) keeps dealing costs low, but that’s not enough to make up for its elevated TER. Expenses can have a major impact on a fund’s long-term performance, and our research has shown that low cost funds often outperform more expensive competitors over the long-term. Accordingly, we think investors should look elsewhere for equally compelling traits but lower charges.
