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The UK growth funds keeping a cool head during style rotations

12 September 2017

Research from FE Trustnet highlights the funds in the IA UK All Companies sector to have achieved the greatest number of monthly outperformances over the last year.

By Lauren Mason,

Senior reporter, FE Trustnet

Old Mutual UK Dynamic Equity, Unicorn UK Growth and R&M UK Equity Long Term Recovery are among some of the IA UK All Companies funds to have best-navigated the aggressive style rotations endured over the last year on a monthly basis, according to research from FE Trustnet.

This research comes approximately one year on from the market’s swift swing in sentiment in favour of value stocks relative to their growth peers.

Data from FE Analytics shows that, between the start of September and the end of December last year, the MSCI United Kingdom Value index outperformed its growth counterpart by 12.66 percentage points with a total return of 11.86 per cent. This is a far cry from the rest of the year before September 2016, when UK value stocks were left trailing in the dust.

Performance of indices September to end of December 2016

 
Source: FE Analytics

Year-to-date, however, this trend has taken a sharp U-turn once again with the growth index doubling the returns of its value counterpart so far.

Needless to say, this has been a challenging 12 months for UK equity fund managers to outperform the FTSE All Share index, let alone on a relatively consistent basis.

As such, we looked at the number of months over the last year that funds in the IA UK All Companies sector have managed to beat the index.

To do so, we calculated the monthly relative returns of each fund in regard to the FTSE All Share. Our research found that, out of 260 funds with long-enough track records, only 68 (or 26 per cent) managed to outperform the index during more than six of the last 12 months.

Four funds came out on top having outperformed the FTSE All Share during nine out of the last 12 months.



Of these, the fund with the highest individual monthly return relative to the index at 7.71 per cent in April is FE Alpha Manager Fraser Mackersie’s Unicorn UK Growth fund. Its worst month over the last 12 was October, when it was down a relative 2.53 per cent.

The £29m fund aims to provide long-term growth through bottom-up stock selection, which tends to result in a concentrated portfolio of stocks residing further down the market cap spectrum. Examples of its largest individual weightings include identity management specialist GB Group, consulting services provider First Derivatives and concrete installation equipment manufacturer Somero.

Over the last year to the end of August, it has outperformed the FTSE All Share by 20.59 percentage points with a total return of 34.36 per cent.

In second place with its highest monthly relative return of 6.76 per cent in April is Old Mutual UK Dynamic Equity, which is headed up by FE Alpha Manager Luke Kerr. However, investors should note that the five crown-rated fund is benchmarked against the FTSE 250 ex IT index.

Kerr is able to take long or short positions in any UK equities outside of the FTSE 100. The fund currently has a total of 55 positions, with three of these being short.

Over the last 12 months, it suffered its biggest loss relative to the FTSE All Share in December at 2.15 per cent. Its total return over the last year to the end of August is 36.67 per cent, compared to its benchmark and the FTSE All Share’s respective returns of 14.15 and 14.33 per cent.

Performance of fund vs sector, index and benchmark over 12 months to end of August

 
Source: FE Analytics

The third fund to have outperformed the FTSE All Share during nine months of the last 12 is R&M UK Equity Long Term Recovery, which achieved its strongest relative outperformance of 2.85 per cent during January.



As the fund’s name suggests, manager Hugh Sergeant looks to invest in companies that are set to achieve a turnaround in profitability and have therefore been undervalued by the broader market.

As with all River & Mercantile funds, the stocks initially pass through the firm’s bespoke screening system known as MoneyPenny in a bid to filter out any short-term market noise.

Over the last year to the end of August, the £180m fund has outperformed the FTSE All Share by 13.21 percentage points with a total return of 27.54 per cent.

Its largest monthly loss relative to the FTSE All Share was in February at 2.07 per cent.

The fourth and final fund in the IA UK All Companies sector to outperform the FTSE All Share during nine of the last 12 months is Barclays GlobalAccess UK Opportunities, which achieved its greatest relative outperformance compared to the FTSE All Share of 1.75 per cent in March. In contrast, its greatest relative underperformance was in May at 71 basis points.

The fund has four FE crowns and aims to invest in what manager Ian Aylward deems to be ‘emerging and undiscovered talent’.

Over the last 12 months to the end of August, the fund has returned 17.71 per cent compared to its average peer and benchmark’s respective returns of 13.77 and 14.33 per cent.

A further 13 funds managed to outperform the FTSE All Share during eight of the last 12 months. Of these, the vehicle to achieve the highest relative outperformance over this time frame (8.43 per cent in April) is MI Chelverton UK Equity Growth, which is headed up by David Taylor and James Baker.

The £83m fund – which is benchmarked against the sector average – aims to provide growth through a combination of fully-listed and AIM stocks which are deemed to have a sustainable competitive advantage. Its portfolio currently consists of 81 stocks.



Over the last year, it has achieved a total return of 34.34 per cent, which means it has outperformed its average peer by 20.57 percentage points.

Its largest individual monthly underperformance relative to the FTSE All Share occurred in February, when it was down 1.63 per cent.

Hot on its heels with an outperformance of 6.69 per cent in April relative to the index is Standard Life Investments UK Opportunities, which has been managed by Abby Glennie since the start of last year.

The 49-stock fund’s largest exposure is to mid-caps at 57 per cent, followed by small-caps at 12.1 per cent and FTSE 100 constituents at 2.1 per cent. The remaining 28.4 per cent are in stocks outside of the FTSE.

Over the past year, the fund has outperformed its sector average and the FTSE All Share (it is in fact benchmarked against the FTSE All Share ex 100 & IT) by 14.47 and 13.91 percentage points respectively with a total return of 28.24 per cent.

Performance of fund vs sector and index over 5yrs to end of August

 

Source: FE Analytics

Its worst month over the last year was October, when it was down 2.54 per cent relative to the FTSE All Share.

Other funds worthy of note which outperformed the index during eight out of the last 12 months include Standard Life Investments UK Equity Recovery, MFM Bowland and SVM UK Growth.

In contrast, SF Delmore Growth & Income was the only actively-managed fund to beat the FTSE All Share just once over the past year. Franklin UK Opportunities was only just in front, having outperformed the index during only two of the last 12 months.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.