Lower perceived risk, availability of corporate balance sheets and company information, less currency risk in the sterling denomination with no exchange rate, and generally good performance make UK All Companies an appealing sector for investors.
To qualify, funds must hold at least 80 per cent of assets in UK shares and have a primary objective of achieving capital growth. The sector aims to benefit from the growth potential of UK companies, giving individuals the opportunity to invest in large UK blue chip companies – many with global exposure – as well as medium and smaller-sized companies.
However, UK All Companies ranked as the worst-selling IMA sector for June 2014 with a net retail outflow of £421m, the first time it had occupied the bottom spot since May 2013.
Total funds under management stood at £798bn, despite equity being the best-selling asset class for the 15th consecutive month with net retail sales of £1.2bn.
Despite UK All Companies unpopularity, the not dissimilar UK Equity Income sector was the best-selling during the same period with net retail sales of £1.4bn.
There are several reasons behind UK All Companies fall from grace. Speculation over risk of an economic recession, investors’ desire to expand their portfolio overseas, change in the needs of investors looking to invest in equities producing higher dividends in order to generate income, or a desire for a high level of security that comes with equities all could have made investors less keen to purchase funds in the UK All Companies sector.
Despite being the worst-selling sector, UK All Companies funds continue to perform consistently above average.
A recent study from F&C Investments’ FundWatch found that 4.7 per cent of funds in the UK All Companies sector had ended up in the top quartile for the entirety of the past three years from July 2011 to June 2014, making it the top sector in the F&C consistency ratio.
The ratio reviewed the 12 major market sectors, filtering out funds that are consistently above average in each of the last three 12 month periods, and those consistently in the top quartile. In the 12 main sectors researched, there are currently 1,086 funds with a three year track record.
The average to achieve consistent top quartile for all sectors was 2.3 per cent, which demonstrates the difficulty of maintaining high performance across different stages of a business cycle.
Bond funds in particular have struggled to maintain a spot in the top quartile under changing market conditions, according to the report.
The broader market conditions remain challenging, with only 25 out of 1,086 funds achieving top quartile returns over three years to the end of the second quarter, close to the bottom of the historic range for the F&C MM consistency ratio at 2.5 per cent.
Top funds in the sector
The UK All Companies sector as a whole has grown by 120.8 per cent in the past 10 years to the end of June 2014, 98.8 per cent in the past five years, 14.1 per cent in the past year, but shrank by 1.8 per cent in the month of June, according to Morningstar.
The top performing unit and investment trusts ranked over five years to 1 August are shown in the Table.
These figures represent total investment return net of charges, other than initial charges if applicable, for a basic rate taxpayer including reinvestment of all dividends.
MFM Slater Growth was the sector’s top performing unit trust. The stated objective of the fund is to achieve long-term capital growth by investing in attractively priced companies that exhibit superior and sustainable growth potential.
The fund consists of a concentrated portfolio of between 25 and 50 stocks invested primarily in UK stocks, although overseas equities are not out of the question. Price to earnings growth ratio is the primary valuation tool used.
Managers additionally look for sustainable and above-average earnings growth investment prospects, strong cash flow, a competitive advantage – such as a high market share, brand name, or some factor which adds confidence to the growth outlook – a positive recent trending statement, an absence of heavy directors’ selling and, ideally, some directors’ buying, when screening for possible growth investments.
Henderson Opportunities Ordinary shares, which states its investment objective as to provide shareholders with higher than average growth of capital over the medium to long-term from a portfolio of predominantly UK-based companies, ranked as the number one investment trust.
The trust is widely diversified across the UK market, being unconstrained by asset allocation restrictions, while targeting UK growth companies and special opportunities. The average volatility for the top performing unit trusts was 3.9, and 4.1 average volatility for investment trusts.
FIVE QUESTIONS
How risky is the fund?
Many investors view their own country as being less risky and more stable than overseas investments, and therefore feel more comfortable putting their money into trusts that invest in companies they know. However, lower risk in domestic investments can never be guaranteed.
How does performance compare with that of rival sectors?
UK All Companies ranked as the worst-selling IMA sector for June 2014 with a net retail outflow of £421m. However, FundWatch found that 4.7 per cent of funds in the sector had ended with top quartile performance for the entirety of the past three years from July 2011 to June 2014.
How much exposure is there to foreign stocks?
UK All Companies funds must be comprised of at least 80 per cent investment in UK shares, so a small degree of foreign investment is allowed.
What are the primary aims and objectives of funds in the sector?
The primary objective of funds is to achieve capital growth. UK All Companies aims to benefit from the growth potential of UK companies in all sectors.
What size companies does the fund invest in?
UK All Companies funds allow the opportunity to invest in large UK blue chip companies, many with global exposure, or medium and smaller-sized companies.
