The FTSE All-Share index has delivered a respectable 2.58 per cent for the year to date to June 5 2014, although this is almost a full two percentage points below the 4.21 per cent return from the S&P 500 index.
Interestingly, in a slight reversal of fortune, it is the larger-cap stocks, those perceived by many to be more defensive in style, that have topped the UK equity table, with the FTSE 100 index returning 2.8 per cent for the year so far, according to FE Analytics.
The FTSE Small Cap index is only slightly behind with a return of 2.04 per cent, but the mid-cap stocks of the FTSE 250 index are the ones that have been hurting in 2014 with a return of just 1.54 per cent.
Meanwhile, the FTSE 100 has also been edging ever closer to the 7,000 mark, sitting at 6,838 at June 6 2014, with opinion divided on when or if the index will cross this barrier by the end of the year.
Darius McDermott, managing director at Chelsea Financial Services, says: “Looking at a 20-year graph of the FTSE 100, it does appear that the UK market is at a crucial juncture. It shows very clearly a ‘triple-top’: the market has reached a peak of 7,000 (or very close to 7,000) on three occasions now – December 1999, June 2007 and today.
“In the short term, I believe any sustained market rally needs to be driven by the mega caps. There is little evidence yet that this will happen, apart from a slight pick up in M&A.
“If we are to finally break the 7,000 barrier, earnings must be delivered, and the big companies need to lead the way. Any disappointing earnings will be punished.”
Richard Buxton, head of UK equities at Old Mutual Global Investors and manager of the £1.3bn Old Mutual UK Alpha fund, notes that, while the FTSE 100 “continues to flirt with multi-year highs”, there has been a “quite savage” sector and size rotation.
He adds: “The mid-cap index has fallen roughly 8 per cent since the end of February, while the FTSE All-Share index is barely unchanged, indicating the degree of rotation away from mid- and small-cap stocks to the previously unloved mega-cap stocks.
“In fairness, the valuation stretch between the mega-cap stocks and the rest of the market had reached levels by the end of 2013 from which there was always likely to be some snap-back. The catalyst within the market seemed to be the bursting of the hot momentum sectors – notably tech and biotech in the US, alongside some highly questionably priced IPOs here in London.”
The manager suggests the bursting of this bubble has led to a ‘take profits’ mentality in anything that had performed strongly in recent years, including small and mid-cap stocks.
For the five years to June 5 2014, both the FTSE 250 and the FTSE Small Cap indices have outperformed their larger peers, with returns of 136.61 per cent and 120.41 per cent respectively, compared with the FTSE 100 index return of 83.2 per cent.
Meanwhile, in fund terms, three of the 10 best-performing vehicles in the IMA UK All Companies sector for the year to June 5 are those with a specific growth focus, while the other constituents include two recovery funds, a value offering and two ‘alpha’ portfolios.
This suggests that, in the improving UK economy, those managers looking to focus on growth and undervalued or mispriced situations are the ones that have fared best in the past 12 months.
Topping the table is the £172.8m R&M UK Equity Long Term Recovery fund, managed by Hugh Sergeant, which invests in stocks that “meet the manager’s recovery criteria of a turnaround in company profitability over the longer term”.
Interestingly, at the opposite end of the spectrum there is a more mixed bag of funds, including two alpha funds, and a growth fund, as well as recovery and special situations strategies.
This highlights that while the macroeconomic environment might benefit some strategies and approaches better than others, the important factor remains the underlying stock selection and investment.
Nyree Stewart is features editor at Investment Adviser
