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Fund Review: UK Growth

Introduction

A search of funds with the term ‘UK growth’ in the title on FE Analytics shows there are roughly 50 such funds available to UK investors, some focusing on small and mid caps, others favouring a multi-cap approach.

Those investing in smaller companies may have fared better in the past year, as the FTSE Small Cap index rose 11.9 per cent in the 12 months to January 6, while the FTSE All-Share index made a more modest 1.2 per cent gain (see chart).

UK equities face a number of headwinds in 2016 though, including the prospect of a referendum on the UK’s membership of the European Union, the outcome of which is becoming increasingly difficult to call. An interest rate hike by the Bank of England is also weighing on investors’ minds, although most agree that if the central bank does follow the US Federal Reserve this year it will not be until the second half.

Goldman Sachs has shifted its prediction for the first UK rate rise to the fourth quarter from its earlier second-quarter prediction.

Simon Moon and Fraser Mackersie, co-managers on the Unicorn UK Income fund, claim: “Smaller-quoted companies are well placed to continue to outperform in 2016 in what should again prove a stock-pickers market. The outlook for larger-quoted firms remains mixed, with dividend cover in many cases approaching unsustainable levels. In particular, the pressure on commodity-based stocks is likely to persist.

“By contrast, the outlook for smaller, more domestically focused firms looks robust. Disposable income should continue to improve as real wages increase, while other inflationary pressures remain benign, thus creating a strong environment for efficiently managed businesses that are exposed to discretionary consumer spend in the UK.”

Investors may have already picked up on this, as shown by net retail sales figures for the Investment Association UK All Companies sector. The category recorded significant outflows in the first half of 2015, peaking at £1bn in March but then attracting inflows in June, July, August, September and November, with net retail sales of £303m in July.

Yet Julian Fosh, co-manager of the Liontrust UK Growth fund (see page 27), cautions: “The main headwinds to performance for UK equities are increasing geopolitical tensions and low levels of [global] growth, particularly now that the interest rate in the US has started to rise. Despite the apparent recovery in profits and earnings since 2012-13, returns on capital have continued to fall inexorably.

“Last year demonstrated that however difficult the general economic backdrop, there are always individual companies that are able to buck the trend.”

Mr Moon and Mr Mackersie comment: “Valuations in the small and mid-cap sectors of the UK equity market appear largely up. But given evidence of a return to sustainable revenue growth, strong balance sheets and improving cashflows, the expected growth in earnings should comfortably support valuation levels.”

THE PICKS

Jupiter UK Growth

Steve Davies was appointed co-manager of this £1.7bn fund in 2013 and became sole manager in May 2015, so it is still early to gauge his performance. However, the vehicle has a good long-term track record, delivering 64.5 per cent in the five years to January 6, compared with the 37 per cent average return by its peer group, the IA UK All Companies sector. The portfolio has 34 per cent allocated to consumer services and a 27 per cent weighting to financials. This is reflected in its top-10 holdings, which include Lloyds Banking Group, Thomas Cook and Barclays.

Premier UK Growth

This £122m fund is managed by Chris White and has produced consistent returns over one, three, five and 10 years. The manager took over the fund in July 2013 so it’s still fairly early days. Mr White has a remit to invest in UK large, mid and small caps in order to achieve his primary objective of capital growth. The portfolio boasts a varied top 10, with the largest holdings including Greene King, Trinity Mirror and Dairy Crest. In the past 12 months, the vehicle has delivered a decent 11.2 per cent, versus the IA UK All Companies sector average return of 3.7 per cent.

EDITOR’S PICK

Unicorn UK Growth

Run by Fraser Mackersie and Simon Moon, this fund is a modest £17m in size despite having launched in 2001 and clocking up strong returns ever since. The managers, who do not track a benchmark, run a concentrated portfolio of up to 50 stocks and invest across all sectors of the UK market. The fund’s biggest weighting is to software and computer services, at 32.4 per cent. Its top-three holdings are DotDigital Group, First Derivatives and Clipper Logistics Group. FE Analytics shows the fund delivered 102.5 per cent in the 10 years to January 6, and has generated a solid 10.4 per cent return in the past 12 months. This fund seems to have been rather overlooked by investors.

In this special report