Fund Review: Buyers snub UK funds despite manager comeback

The UK market can be a gateway to global corporate growth, given the international focus of many large-cap stocks. Yet despite an upswing in earnings upgrades around the world, UK equities are not faring as well as others.

Much of this could be put down to the UK’s own economic outlook, but even this has been muddled by contradictory soft and hard data. Strong manufacturing and export figures have not been matched by robust GDP growth. Inflation remains strong, driven by sterling, and the central bank consistently warns the market it has underestimated its policy-tightening cycle.

As a result, UK equity fund flows have struggled severely in 2017, with net redemptions of £1.3bn from the IA UK All Companies sector by the end of July. The picture is worse over 12 months, with net outflows reaching £3.6bn. Equities in general have recovered from a difficult 2016 to pull in £5.2bn this year.

So why are investors so pessimistic? The FTSE All-Share index has risen 6.6 per cent year to date, and the FTSE 100 is up 5.6 per cent. Mid-cap stocks have resumed their position as outperformers, rising 11 per cent. 

Active managers have also held their own. The average fund in the UK All Companies sector has returned 8.5 per cent, with 65 per cent of funds in the peer group currently beating the FTSE All-Share.

Individual funds have performed well, with year-to-date returns reaching as high as 27 per cent in the case of the Old Mutual UK Dynamic Equity fund, managed by Luke Kerr. Only three vehicles have lost investors capital.

Sentiment could be being driven by macro and currency factors. The FTSE 100 has developed a strong inverse correlation with sterling, and the currency has had a mixed period, weakening against the euro but rising against the dollar. Following last month’s Bank of England meeting – which pointed to the increased possibility of a November rate rise – the pound rose against both.

In terms of the UK’s own economic outlook, core inflation is above target, with previous sterling weakness beginning to feed through. Business confidence is mixed and quarterly GDP figures have reached just 0.2 and 0.3 per cent respectively for the first two quarters of 2017, compared with an annual growth rate of 1.9 per cent in 2016.

The outlook among many asset allocators is one of pessimism. John Stopford, head of multi-asset at Investec, says: “Evidence has emerged of more significant concerns for an economy still reliant on consumer credit and housing.

“We remain more cautious on the prospects for UK equities where returns continue to be driven by conflicting factors. The market remains underpinned by easy monetary policy and sterling weakness, both of which are less supportive given a more hawkish central bank and a stronger pound.”

THE PICKS

R&M UK Equity Long Term Recovery

Hugh Sergeant’s strategy is frequently deemed to be a pure value fund, but the manager’s patience and skill are on show during the good times. Despite struggling between 2014 and 2016, periods before and after more than make up. Currently, the bulk of the fund is weighted towards banks, miners and oil stocks, but with 219 holdings, returns are diversified. Mr Sergeant is first-quartile over one, three and five years, returning 134 per cent since September 2012, versus a 66 per cent UK All Companies sector average.

SDL UK Buffettology 

Keith Ashworth-Lord has many fans among the fund-buying community, with his performance of late justifying his idiosyncratic investment picks. The fund has 29 holdings, with large positions taken in small- to medium-sized companies and held for the long term, with outperformance to be judged on a five to 10-year basis. The £180m strategy has not disappointed, returning 140 per cent in the past five years and 69 per cent over three, far above sector averages of 66 and 28 per cent respectively. The FTSE All-Share index has gained 56 and 26 per cent over the equivalent periods. 

EDITOR’S PICK

Old Mutual UK Dynamic Equity  

Luke Kerr’s performance on this mid-cap strategy has recently led to his fund being soft closed. The £579m fund has holdings in typical FTSE 250 stocks such as BooHoo, PaySafe and Fever-Tree, but unlike peers runs a significantly more concentrated portfolio, with just 49 holdings. While running greater stock-specific and liquidity risk, the manager has avoided major drawdowns. Performance across all time periods is far above its FTSE 250 benchmark and peers. In the past year, Mr Kerr has returned more than double that of the sector average, and almost triple it over five years.