Just two funds from the IA UK All Companies and IA UK Equity Income sectors have outperformed the FTSE All Share index in each of the past five calendar years, according to research by FE Trustnet.
It has been a challenging few years for the UK market, encumbered with Brexit-related uncertainty as well as the same global headwinds that have caused high levels of volatility among its international peers.
As such, a surprisingly small number of fund managers have managed to beat the FTSE All Share index in each of the past five years – none of the 87 funds in the IA UK Equity Income sector have achieved this feat while just two of the 262 vehicles in the IA UK All Companies sector have managed it: TB Evenlode Income and Liontrust UK Growth.
The £3.5bn, five FE Crown-rated TB Evenlode Income fund aims to provide long-term total returns, with an emphasis on income.
The analysts on the FE Invest team said the fund had an “uncompromising process”, consisting of quantitative screening, comprehensive modelling and the managers’ proven investment experience.
“The monitoring of a smaller universe of companies allows it to delve deeper into modelling and understanding companies, which makes for strong stock selection and fewer mistakes,” they added.
“Its processes and systems have become increasingly robust and efficient over the years, which sets Evenlode apart from other smaller management houses.
“With increasing commonality between larger cap income managers, we find that this fund provides a consistent process and unique profile that will complement any investor portfolio in search of income.”
The fund, headed up by FE Alpha Manager Hugh Yarrow, has made 254.50 per cent since launch in October 2009 compared with 120.12 per cent from the FTSE UK All Share index.
Performance of TB Evenlode Income fund versus index since launch
Source: FE Analytics.
It is yielding 2.9 per cent and has an ongoing charge figure of 0.9 per cent. In an attempt to limit inflows it now comes with a standard initial charge of 5 per cent, although this is waived on certain platforms.
The five FE Crown-rated £398.7m Liontrust UK Growth fund is headed up by FE Alpha Managers Anthony Cross and Julian Fosh.
Cross and Fosh use what they call the ‘Economic Advantage’ strategy – this means only investing in companies that possess at least one of three intangible barriers to competition: intellectual property, a strong distribution network, or high contracted recurring income.
The analysts at FE Invest said the fund provides good core UK equity exposure because of its broad coverage of the UK equity universe and majority large cap exposure.
“Even within the fund’s smaller cap exposure, many companies are global or industry leaders that can withstand market cycles to a greater extent, thus providing good protection in weak markets,” they said.
Tom Sparke, investment manager at GDIM Discretionary Fund Managers, added: “The Liontrust fund is a relatively small fund and therefore can hold smaller companies in more meaningful position sizes, which can contribute to growth as well as diversifying exposure.”
Since the managers jointly took over in March 2009, the fund has returned 302.57 per cent compared with 195.77 per cent from the FTSE UK All Share. It yields 2.12 per cent and has an ongoing charges figure of 0.91 per cent.
Performance of Liontrust UK Growth fund vs index under current management
Source: FE Analytics
A third fund, the MI Chelverton UK Equity Growth, co-managed by James Baker and Edward Booth, has outperformed the FTSE UK All share since 2015. It was not included on the list because it does not have a track record going back to the beginning of 2014, the starting point of the period under consideration.
Performance of MI Chelverton UK Equity Growth fund vs index since launch
Source: FE Analytics
Darius McDermott, managing director of Chelsea Financial Services, was shocked that such a small number of funds outperformed in every year.
He conceded, however, that it was a good reminder that beating an index for five consecutive years is no easy task.
“There will be lots of managers who are ahead of the index on a cumulative basis over the five years but not in each of those five individual years,” he added. “In fact, 94 out of 230 funds are ahead of the All Share from the start of 2014 to the end of last week on a cumulative basis.”
Sparke added: “I think for many fund managers their ‘style’ will not always work out over a 12-month timeframe.
“For example, a ‘deep value’ fund may require a longer timeframe for its theses to play out and if, as a fund manager, your speciality is not in favour, you may struggle against some more mainstream competitors.”
He added that any “closet trackers” or overtly passively allocated funds will, by their nature, underperform the index as their fees will detract from the returns.
McDermott said it is also worth noting that the majority of the last five years have seen markets dominated by companies that have predictable growth, yet in 2016 there was a real shift towards the value style of investing, “and that is why a lot of funds will have failed your test. Also, you will notice that in 2016, although both funds were ahead of the index, they were not far ahead of the index.”
These funds were able to outperform because of their stockpicking, he said, in spite of investing in “quality companies”.
The managing director also referred to the role of Brexit. “This has distorted performance of some funds during that time,” he said. “Straight after the referendum there were a number of good managers who believed the UK would vote for remain. So those who were pointed at the ‘domestic end’ of the UK stock market got burned.”
He added that the weak pound resulting from the referendum led to strong outperformance of large caps during the rest of 2016. “Hence funds with a more mid- or small-cap bias tended to underperform in 2016 and this is quite common in the All Companies sector. Whereas the All Share index is dominated by the FTSE 100.”
Sparke said that a lesson investors could learn from the research finding is that protecting on the downside is just as important as gaining upside. “Looking for the increased certainty of dividends – both funds provide an income of over 2 per cent – and holding an open mind on the size of companies included in a fund can prove very valuable mitigating factors in difficult markets.”