Active UK equity managers set to suffer if commodities rebound

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Recent outperformance by active UK equity managers could come to an end if commodity markets cause indexes to rebound, says a JP Morgan Asset Management fund manager.

In the one year to the end of 2015, 85.9 per cent of UK mid and large cap equity funds beat the benchmark, according to research from S&P Dow Indices. This dropped to 73.3 per cent over the three-year period and 29.3 per cent for the 10-year period.

By comparison, 75.2 per cent of Europe ex-UK funds outperformed the benchmark last year, 44.5 per cent over the three-year period and 27.3 per cent for the 10-year period.

The FTSE 100 has significant exposure to commodity-based companies, which showed signs of improvement towards the end of Q1 2015.

Last year was one of the worst ever for commodities, with Brent Crude down 45.7 per cent and Nickel down 42.6 per cent, while the S&P GSCI commodities index lost 32.9 per cent.

James Illsley, portfolio manager for the JPM UK Equity Core fund, says active managers have been operating in a “macro sector market” for the past couple of years, meaning they only had to make the right sector calls to outperform – namely avoiding the slumped commodities-based equities that were bringing the FTSE 100 down.

According to JP Morgan, 17.25 per cent of active funds in the IA UK All Companies and IA UK Equity Income sectors were keeping pace with or outperforming the FTSE 100 in Q1 this year.

By April the FTSE 100 was seeing a change of fortunes closing at its highest level this year, after banks and mining companies propelled the index up 1.5 per cent over the course of the day.

“I think going forward it’s going to be more about picking the right stocks, within sectors,” Illsley says.

The JPM UK Equity Core Fund has around an 80 per cent allocation to FTSE 100 stocks, where commodity-based stocks tend to reside.

At the margin we were adding to oil stocks because we were expecting the oil supply and demand balance to improve this year, which is coming through. For the mining we’ve been adding it through the first part of this year,” he says.

Simon Dorricott, senior manager research analyst at Morningstar, says on average active UK equity managers were underweight commodity-based sectors.

Dorricott pointed to the GAM UK Diversified fund, managed by Andrew Green, as one that had taken the contrarian position, holding a high position in Anglo American and Lonmin.

The fund saw poor performance in 2015. FE data shows returns of -12.2 per cent over the past year, compared to the IA UK All Companies’ -5.7 per cent. However, it bounced back in Q1 2015, returning 8.5 per cent compared to the IA UK All Companies’ 3.1 per cent.

Dorricott added that Man GLG’s Undervalued Assets fund had increased its mining exposure recently, particularly to Rio Tinto.

AJ Bell investment director Russ Mould said this year’s rally would “definitely have caught some on the hop”.

“The decision a fund manager has got now is that after the big rally we’ve seen in Antofagasta, Anglo American, Glencore, is this a bear trap rally or is it indeed the start of something new?”