The last 17 months have provided a challenging environment for investing in UK-listed equities. From April 2009 to the end of 2010 the FTSE All-Share index rose by 32.6%, providing some consolation to investors who had stayed with the asset class following the huge sell-off in 2008 through to early 2009 when the index fell 36.3%. However, in 2011, as concerns over the global economic recovery surfaced and the eurozone sovereign debt crisis spread from the periphery to Italy and Spain, equity markets faltered, with short-term performance being driven even more strongly by investor sentiment and the so-called “risk-on, risk-off” trade.
The performance of the FTSE All-Share index gives evidence of these wild fluctuations. In 2011 the index returned -3.5% but in the first quarter of 2012, as investors took comfort from US economic growth and the ECB’s Long-Term Refinancing Operation (LTRO), the index rose 6.1%. Such positive sentiment had waned by the second quarter, however, and in April and May the index lost all of those gains and more to show a loss of 7.1%.
It is clear that the performance of active managers has been at the mercy of such fluctuations. In 2011, the IMA UK All Companies sector average was 3.5% behind the index, but in the first quarter of 2012 the sector average outperformed the index by 2.8%. In such a context and with ever increasing competition from passive options, some investors may well have lost faith with active management. However a number of funds have shown the ability to outperform throughout these recent difficult conditions.
Below we outline five funds that have all outperformed the FTSE All-Share index in 2011, as well as in both the first quarter of 2012 and the second quarter to the end of May, adding to their strong longer-term track records.
Alastair Mundy’s Investec UK Special Situations fund and John Wood’s JO Hambro UK Opportunities fund have performed well over the last 17 months, helped to some extent by significant exposure to blue-chip, dividend-paying stocks.
Alastair Mundy manages his fund in a contrarian manner. He buys shares in strategically well-placed companies when sentiment towards them is at or near its worst and then sells them as a combination of improving profitability and re-evaluation of their long-term prospects takes place. Although not an income fund, Mundy is aware of the importance of dividend to total return, which combined with restrictions on how underweight the portfolio can be to the FTSE 100 has helped to provide some protection against falling markets.
Wood’s portfolio is built without benchmark constraint and is concentrated to the extent that it will hold 30-40 stocks. Such characteristics could lead to high levels of volatility, whereas the investment process leads to a more consistent return profile. He combines top down, thematic analysis with bottom-up stock picking where the focus is on finding quality stocks at attractive valuations. The quality focus along with his currently sceptical view of global economic growth has meant that the portfolio has protected investors when equity markets have fallen, yet allowed them to participate in rallies.
Investec UK Special Situations has a Gold Morningstar OBSR Analyst Rating, while JO Hambro UK Opportunities is rated Silver.
Cazenove UK Opportunities, managed by Julie Dean, performed very strongly in the equity rally during the first quarter of 2012, outperforming by 8.4%, but also held up well when markets sold off in 2011 and more recently in Q2 of 2012. The investment process is founded on the philosophy that the business cycle has an important impact on future investment returns. The process combines both top-down and bottom-up analysis in order to anticipate changes in the business cycle and their impact on share prices. At the stock-specific level she is supported by analysts within the team who research by sector. Their focus is on understanding the key drivers of future earnings, in particular relative earnings growth. Dean has shown strong stock picking ability over this volatile period, specifically adding value in the mid-cap sector. That said, it is the consistency of the fund’s performance that is particularly impressive. The fund has a Bronze Morningstar OBSR Analyst Rating.
Two funds which have produced consistent performance with significant small cap exposure are Liontrust Special Situations and MFM Slater Growth, both the former and the latter are rated Bronze by Morningstar OBSR analysts.
Liontrust Special Situations aims to achieve long-term capital growth and to outperform the FTSE All-Share index on a total return basis through investment in a portfolio of UK shares with a concentration on medium and small cap stocks. The fund is managed by Anthony Cross and Julian Fosh. Cross has managed the fund since inception and the fund has been co-managed with Fosh since June 2008. The managers identify companies by two criteria, which they believe are the key to making some companies successful and others less so. The first criterion is the strength, sustainability and exploitation of a company's intellectual capital. The second is how key employees are motivated and retained, with the preference being through direct ownership of the company’s equity. When deciding to purchase stocks the managers also focus on valuation metrics.
MFM Slater Growth is benchmarked against the IMA All Companies sector average and FTSE All-Share index, although investors should note that the composition of this fund is likely to be more heavily focussed on smaller companies than the index and sector average. The fund is managed by Mark Slater who is Chief Investment Officer and co-founder of Slater Investments. In order to identify investment opportunities the process is initially reliant on a screen looking at the relationship between P/E ratio and earnings growth (peg ratio). While the peg ratio drives the process, the manager also looks for companies to have strong cash flow; a robust balance sheet, avoiding companies with high gearing; and a strong competitive position whereby they have an identifiable edge over competitors.
Despite small cap stocks underperforming considerably in 2011 both Liontrust Special Situations and MFM Slater Growth produced positive returns and then have also been able to benefit from the relative outperformance of such companies in 2012.
Find out how Alastair Mundy approaches out-of-favour stocks in this video.
Hear from Mark Slater on three of his top stock picks in this video.
