PA ANALYSIS: Why UK equity managers are battling with the small print

Forget Greece and today’s other macro matters, the way forward is in the small print, especially funds within the UK All Companies sector.

PA ANALYSIS: Why UK equity managers are battling with the small print


First Old Mutual Global Investors has written to all unit holders of Richard Watts’ £1.8bn UK Mid Cap Fund, to communicate a change in its definition of medium-sized companies.

The fund will now have freer reign to invest in stocks outside the FTSE 250 that still have a market capitalisation “consistent with inclusion in the index”, such as those in the AIM market.

Secondly, Schroders’ £1.6bn UK Equity Income Fund, managed by Nick Kirrage and Kevin Murphy, has become the latest fund to be exiled from UK Equity Income having failed to meet the IA’s sector’s stick yield requirements.

This follows the likes of Invesco Perpetual Income, High Income and Income & Growth funds, and Henderson UK Equity Income into the UK All Companies sector having all failed to achieve a yield in excess of 110% of the FTSE All Share over a rolling three-year period.

Constant change

From an income perspective, fund groups bemoan the IA’s “outdated” approach to measuring yield, while going back to the mid-cap example, the dynamic nature of the FTSE 250 means its constituents are constantly changing – Woodford Patient Capital is a new entrant.

So why is this a concern for fund pickers? It is actually FTSE 250 companies that have had the strongest run among UK stocks this year – year-to-date the index is up 11.6% versus 2.7% from the FTSE 100. Therefore it will be mid-cap funds that top the pile when investors look to UK All Companies’ stellar performers.

“When you are selecting funds you have to big a bit deeper in terms of their title and the sector where they are invested,” says Gavin Haynes, managing director at Whitechurch Securities.

“In Old Mutual’s case, the FTSE 250 has had a very good run as a benchmark for mid-caps and it might be the manager is not seeing enough opportunities there and so is looking to widen his scope. There’s no reason why some of these larger AIM stocks shouldn’t be a valid place to invest in.”