Waiting Room: The UK All Companies sector

John Husselbee Liontrust Husslebee

For many investors, a minimum three-year track record remains a prerequisite for considering a fund, immediately ruling out new launches.

While there is an argument for allowing managers to build up a record, for me, the magic three-year rule should be qualified based on who is buying a fund. As a professional multi-manager, it is my job to understand managers and their styles and that knowledge should allow me to make a judgement call on new funds. The opportunity cost of missing three years of performance is potentially considerable, particularly given the calibre of managers launching funds in recent years.

UK All Companies is the largest sector by both size of assets under management and number of funds available. While the sector accommodates a wide variety of fund styles and approaches, there are three basic categories from which to choose, namely growth, income and smaller companies.

This sector has been dominated in performance terms by funds investing wholly or in part in mid caps, which have outperformed for many years. The evidence of this was clear at the point of the Brexit vote in June, after which the sector significantly underperformed the FTSE All Share. Those companies exposed more directly to the fortunes of the UK economy were severely marked down post the shock result to leave the EU. In contrast, large caps thrived with the weakness in sterling providing a boost to the translation of their overseas earnings. That said, a few months on and it is hard to see any effect with indices returning to pre-vote highs.

Under the stewardship of UK manager Tim Russell, the former Cazenove Pan European team is regrouping at Sanditon Asset Management. Cazenove built a solid reputation for UK and European retail funds and when the company was acquired by Schroders in 2013, Julie Dean, manager of the TM Sanditon UK fund, initially moved across to continue to manage her opportunities fund.

She subsequently left Schroders to join Sanditon last year, which also employs Chris Rice, the highly-rated European equity manager. The TM Sanditon UK fund uses a business cycle approach with a fairly concentrated portfolio of 30-40 stocks and an obvious bias towards mid and small cap companies. Looking at a snapshot of the portfolio at the end of August, the fund is weighted towards consumer services, industrials and healthcare. The fund launched in late June 2015 and currently has £115.6m under management. Looking at returns from just over 12 months shows the fund lagging its benchmark, but the manager states clearly that she is looking to achieve returns in excess of the index over three year rolling periods.

The pressure on price in the funds industry is beginning to polarise sectors into low cost passive offerings at one end and higher cost active management at the other. Whilst the focus on price rather than value is frustrating, this polarisation should be seen as beneficial to fund buyers. The fact is if you want adequate returns in the short term buy a passive fund, but if you want the opportunity for outsized returns then invest in an active fund over the long term.

The Fidelity UK Opportunities fund is a concentrated portfolio originally launched in 2011 for manager Leigh Himsworth when he joined Eden Financial. This fund has been on a journey with Himsworth through City Financial and finally rebranding at Fidelity in late 2014. This is perhaps the ideal destination for this process, which is a thematic top-down approach. With the themes in place, Himsworth can then exploit the large analytical resources at Fidelity, mainly outside the FTSE 100. The fund, at £78m, remains fairly small, but with Himsworth continuing to build a good long track record, this may not be the case for very long.

The quantitative team at Aberdeen Asset Management is among a handful pioneering new low-cost active options for the UK retail marketplace. The enhanced index range, of which the Aberdeen UK Equity Enhanced Index fund is part, offers outperformance of the index at a cost comparable to a tracker. The argument is that traditional index trackers move further and further away from the index over time. This is the challenge the range is trying to resolve with a very scientific approach to delivering repeatable performance above the index. This is not a new process and this product marks an upgrade to previous versions in trying to target 0.75 per cent ahead of benchmark.