December 21, 2021

UK Equity Funds: Triumph of the Minnows?

by Dewi John.

Using the Lipper Leaders scoring system to analyse the best performing funds in the IA UK All Companies sector.

 

The year to October 2020 was a dismal one for UK equities, which has been an unloved asset class for some years before this. How things have changed since.

This time last year, when last we reviewed the UK All Companies sector, it was down 13.1% over 12 months, with the effects of COVID having taken a greater toll on the UK than other major equity markets. This year, the sector average is up 36.1%, ahead of all national and regional sectors except some small cap ones, which shows that cutting and running in the depths of a bear market is not the right thing to do. It’s also ahead of its three-year average return (24.1%), and this figure lags both North America (59.2%) and Europe ex-UK (40.%). Over the longer term, the UK is still playing catch up with its developed market peers, with still some way to go.

The market has been good to the UK’s fund managers over the year, unlike the previous year, with only six funds out of 222 with three-year track records being in negative territory. Over one year, the lowest return was 11%—nothing to sneeze at in a “normal” year, whatever that is these days—and the highest being 74.9%.

 

Value Rebound

Last November I wrote that if value as a style revived, then this could serve the UK well given this market has a value bias. Over 12 months this has happened, albeit to a degree. Five of the top 10 funds over this period have a value bias as compared to three for growth. Nevertheless, growth has significantly outperformed value over the past decade, although value has closed the gap over the past year as market leadership between the two styles has flick flacked. Value’s return has undoubtedly helped UK equity funds, but over three years—which is the basis for the top-10 table below—growth dominates, and all but one (and that exception is “core”, not value) have a growth bias. The small-cap tailwind also feeds through into the top 10, with Lipper categorising three as small- and mid-cap funds, including the two that top the table.

Despite the market vicissitudes over the year, half the funds in the top 10 from last year have managed to cling on. The MI Chelverton UK Equity Growth fund remains in first place, followed by two funds from Slater Investments: Recovery and Growth. They all have the same top holding: Future Plc, a media company that publishes a range of titles including Marie Claire, plus the Go Compare website. Despite its impressive returns, it has a heavily diversified portfolio, with currently about 16% of assets invested in the top-10 holdings, as compared to about 30% and 36% for the Slater Recovery and Growth funds, respectively. All three have a Lipper Leader five-year consistent return score of 5—the highest, and the most useful Lipper single metric for investors—so, however diverse the approaches, they’re paying off.

Two of the top-10 funds have less than £100m, one of which (the fourth-placed Consistent Opportunities Unit Trust) has less than £40m—a ballpark minimum fund size for many large investors. This gives private retail investors free reign, as most wealth managers and funds of funds, which would often be all over top performers like a rash, can’t invest in them because they are too small. To take a meaningful position in these minnows, they would need to own a large proportion of the funds themselves, which would conflict with their liquidity constraints. Few retail investors have the “problem” of worrying where to spread a few hundred million, so here, at least, they have an edge.

 

Top-Performing UK All Companies Funds over Three Years (with a Five-Year History)

 

This article was originally published in Moneyfacts, p16 

 

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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