It is no secret that UK equity funds have suffered from poor performance over the last five years. The sector’s challenges have been well documented, from Brexit-related uncertainty, a weak sterling, being particularly hard hit by pandemic-induced lockdowns and three different prime ministers over the last year alone. Most recently, headlines have been dominated by particularly stubborn inflation relative to other developed nations, and the Bank of England trying to cool things down with interest rate hikes.
But during unfashionable periods for various areas of the market, there are always opportunities that get thrown out with the bathwater. And indeed, many fund managers in these areas can utilise attractive valuations to their advantage.
Research from Portfolio Adviser – using data from FE Fundinfo – has found the five best-performing funds in the IA UK All Companies sector which are in the top quartile over three and five years, which are more than £200m in size and which have had at least one manager at their helm for at least half a decade. They have also all comfortably outperformed the FTSE All-Share index and, as investors would expect given their quartile rankings, their average peer:
Artemis UK Select – 36.5% total return over five years
Managed by Ambrose Faulks and Ed Legget since the end of 2015, the £1.7bn Artemis UK Select Fund is able to invest up to 10% of its portfolio in short positions, where bottom-up insights identify a particularly overvalued company. But for the most part, the managers use a systematic approach to stock selection, which combines both company-specific research with macroeconomic views. The priority, however, is to buy companies that are particularly conservatively valued relative to their long-term prospects. Its largest holdings are currently 3i Group at 6.2%, BP at 5%, Barclays at 4.9% and Shell by 4.7%. Some 40% of the funds holdings reside in the financials sector, while 25.8% and 17.2% sit within the consumer discretionary and industrials sector respectively.
Invesco UK Opportunities – 35.1% total return over five years
This £1.2bn fund has been headed up by Invesco’s head of UK equities Martin Walker since 2008, who was joined by deputy manager Bethany Shard in March this year.
The managers focus heavily on valuation when selecting stocks for their portfolio, which currently comprises 40 holdings, and describe their investments as “non consensus”. It has an approximate 15% individual weighting to consumer staples, energy and financials, and 12% in utilities and healthcare respectively. Its top ten holdings account for 44.5% of the overall portfolio, with largest positions including BP, Shell, Unilever and AstraZeneca. While the fund does not have an income objective, it offers a 2.4% dividend yield as a result of stock selection. It is also able to invest across the cap spectrum and has no inbuilt sector bias.
Artemis SmartGARP UK Equity – 34% total return over five years
This is one of five funds in the Artemis stable that uses the firm’s SmartGARP proprietary tool as the foundation of its investment process. While it is an actively-managed fund, it first screens for companies which are growing faster than the market, but which are trading on lower valuations than the market. Manager Philip Wolstencroft – who has run the fund since July 2010 – then chooses companies which have good ‘SmartGARP’ characteristics, which he defines as having lower-than-average valuations, upgrades to profit forecasts, and which are underowned by other investors. They should also benefit from the macroeconomic backdrop.
The £382m fund, which has a 68% allocation to large caps and a 31% allocation to mid caps, counts the likes of HSBC Holdings, GSK, Imperial Brands and the Bank of Georgia Group (up to 20% of the fund can be held outside of the UK) as its largest holdings. It has a 43% allocation to financials and smaller weightings to the consumer discretionary, consumer staples, energy and industrials sectors.
Barclays GlobalAccess UK Opportunities – 23.2% total return over five years
This £343.8m fund has been managed by Stephen Peters since March 2017. He also heads up four more funds for the firm, including its UK Alpha, UK Equity Income and UK Small and Mid Cap mandates. But while Peters is the listed portfolio manager, it is also managed by Lindsell Train, JOHCM and Heronbridge Investment Management.
The fund had 79 holdings and, unlike the other funds on the list, has a marked bias to smaller- and medium-sized companies – although it can and does invest in larger companies too. The team adopts a growth-focused approach to stock selection. Its largest company weightings include Unilever at 4.5%, Schroders at 3.4%, Moneysupermarket.com at 3.3% and RELX at 3.2%. Its biggest sector overweight relative to the FTSE All-Share index is to consumer defensives at 25% compared to 15%, while its biggest underweight is to industrials at less than 10%, compared to the index’s 20% allocation.
Jupiter UK Special Situations – 19.2% total return over five years
Managed by Ben Whitmore since 2006, the £2.1bn Jupiter UK Special Situations Fund bills itself as ‘contrarian’ and ‘value orientated’, maintaining a relatively concentrated portfolio of between 35 and 45 stocks at any one time. What sets it apart from its peers, is that Whitmore believes CEOs can over-emphasise the positives of a firm and downplay the negatives. As such, he places little emphasis on company meetings and instead opts to focus on financial credentials and company reports.
He also aims to avoid ‘herding’ and groupthink as much as possible, at times hiring independent consultants to scope out any potential behavioural biases in the fund.
Some 70% of the fund is in large caps while 13.7% and 11.2% is in mid and small caps respectively. Largest holdings include BP, Shell, GlaxoSmithKline and Imperial Brands. The fund’s top ten largest holdings account for 34% of the overall portfolio at present.
