RC Brown’s decision to stick with M&G’s Tom Dobell and Legg Mason’s Bill Hench has been validated over the past 12 months after the pair put several years of struggles behind them, according to investment director Alan Beaney.
The £3.2bn M&G Recovery fund and the Legg Mason Royce US Smaller Companies strategy had been part of the firm’s portfolios for several years, despite having struggled until last year.
In the three years prior to February 2016, Mr Dobell’s Recovery fund had lost 11 per cent, 19 percentage points behind the FTSE All-Share index. Similarly, Mr Hench’s strategy underperformed its Russell 2000 benchmark by 17 percentage points.
But Mr Beaney said the portfolios’ subsequent outperformance, coupled with the wealth manager’s decision to top up on UK mid-cap funds following the EU referendum, had helped RC Brown’s Balanced fund in the past year.
The M&G vehicle has returned 11 percentage points more than its index since last February, while the Legg Mason small-cap fund is up 13 percentage points on its benchmark after soaring 70 per cent.
Mr Beaney said: “We like to have different styles and they work at different times. We’ve held on to the M&G Recovery, which had frankly been a dog of a performer but has turned around dramatically.
“We had a look at them when they did badly and considered whether they had become bad fund managers. The view was that they were just in the wrong part of the market so we stuck with them.”
Mr Beaney also pointed to the decision to increase exposure to UK mid and small caps following the Brexit vote as another reason for strong performance.
The FTSE 250 index significantly underperformed the FTSE 100 following the referendum, ending 2016 up just 6 per cent compared with 15 per cent for the large-cap index.
However, year to date the mid-cap benchmark has gained 12 per cent versus 7 per cent for the FTSE 100.
“We got Brexit wrong, so in June and July last year we really lagged. But topping up the mid-cap funds has done us no harm at all since,” Mr Beaney said.
The firm increased UK mid-cap exposure by adding to holdings in the £943m Franklin Templeton UK Mid Cap fund and Harry Nimmo’s SLI UK Smaller Companies vehicle.
“All we did was cut it back to our target weightings and reduced North America, Japan and emerging markets, and rebalanced into underperforming areas like UK mid and small caps,” he added.
The Balanced fund has around 51 per cent in UK equities, with 26 per cent in overseas stocks. Despite the heavy overweight to risk assets, Mr Beaney said current valuations were not a huge concern.
“We remain happy with the equity funds because you can’t get yield anywhere else,” he said.
“We have had a very good run, but what gives me more confidence is that we are finding people who are bearish. You don’t generally get bear markets when there are bears around.”