As the home market for intermediaries and other domestic fund selectors, UK equity funds are understandably perceived to be the most well-researched group of portfolios in the retail investment universe. But not many of the big names associated with the sector have won out over the past half decade.
Table 1, showing the top 20 funds and trusts over the past five years, is admittedly a static snapshot of the UK All Companies fund and investment trust sectors. Still, it is worth noting that almost half of the 16 open-ended offerings included are less than £250m in size.
As many of those ‘stars’ struggle to post healthy returns, and competition from cheap trackers increases, it is often the lesser-known managers that have prospered.
Another reason for this is the part of the market on which they focus. The nature of the portfolios featured looks more similar to the UK Smaller Companies table featured in the March edition of Money Management than a list of funds investing higher up the cap scale.
It is not until the 12th entry in the table – the L&G Growth Trust – that a strategy focusing predominantly on large caps can be found. It holds 74 per cent in larger businesses, whereas even Marlborough Multi-Cap Growth has just 20 per cent in shares it describes as “large” or “mega” on a market capitalisation basis.
Of the remainder, only Fidelity Special Values, Lindsell Train UK Equity and R&M UK Recovery could feasibly be deemed large-cap portfolios.
But few UK funds of any kind have attracted money in recent months given the uncertainty of Brexit. Even some UK portfolios themselves are now looking elsewhere. As detailed in Table 2, one investment trust sitting in the Association of Investment Companies UK All Companies sector – the Manchester & London trust – held less than 5 per cent of its portfolio in UK businesses as of July. Funds and trusts are usually required to hold 80 per cent of assets in UK companies.
Table 2: Funds and trusts excluded from the top 20
Investment information notfreely available to advisers
Manchester & London
Invests predominatelyoutside the UK
Quilter Investors Equity
Broadly replicates OldMutual UK Mid Cap
Aviva UK Equity MoM 1
Segregated mandate basedon Lindsell Train UK Equity
Source and Copyright: Money Management
The vehicle’s performance has been stellar, in part due to its heavy reliance on US tech firms, but it has been excluded from the table due to the make-up of the portfolio.
Small and mid-sized companies’ dominance is nothing new. Ranking funds over 10 years shows these trends have, perhaps unsurprisingly, prevailed for as long as the bull market. More than half of the top portfolios over five years remain in the top 20 when the time horizon is extended to a decade; the remainder is largely made up of mid-cap funds.
The disparate nature of the UK All Companies sector can also mislead fund selectors in another way. The exodus of money from UK strategies has been a feature of the past two years, and was the subject of Money Management’s cover story in February.
This trend, which has accelerated over the past six months – outflows for the first half of this year are already well in excess of 2017’s full-year figure – is being driven by several factors. But the numbers are arguably skewed by the travails of several income funds that would usually sit in the UK Equity Income sector.