We are in the heart of the cricket season, but UK equity managers have faced their fair share of googlies already this year.
An oil price recovery and the Shell/BG mega-merger in the resources sector, pre-election uncertainty and the subsequent rally, and fears over Brexit and Grexit, have all had an impact.
Still, the multibillion pound behemoths in the UK Equity Income and UK All Companies sectors remain a first choice for wealth managers’ domestic and, to some extent, global equities exposure.
With ever more scrutiny of fees and the shaming of ‘benchmark huggers’, now is a good time to look at the active bets UK fund managers have been taking and how they might benefit, or come unstuck, should conditions change.
Year to date, the FTSE All Share climbed by 6.3%, though this does not tell the whole story of a volatile six months for equities. Six years into a bull market, are we now spluttering to a slowdown for risk assets?
“Post-election, what we are finding is that a lot of good stockpickers are saying they are struggling to find value,” says Rob Burdett, co-head of F&C’s multi-manager team.
“That’s not to say the market can’t continue to go up. In fact, our central case is that the market may well climb the wall of worry. Overall, companies remain in good shape but it is more a case of discriminating which companies can deliver.”
Reality bites
With this in mind, perhaps the best place to start with is the bears.
Crispin Odey, for example, is one high-profile investor whose performance has suffered of late through defensive positioning. His conviction is that equities are in bubble territory, with ultra-loose monetary policy having detached valuations from reality.
Another high-profile bear is Sebastian Lyon, manager of the more globally diversified £2.6bn Troy Trojan Fund, which has lagged due to high holdings in cash and gold.
While the UK economic outlook may look relatively rosy for the majority, understanding the correlation of a fund to its benchmark – often packaged as part of the new trend for ‘active share’ – is vital in determining how it may fare if things take a turn for the worst.
This is especially true for the some of the biggest funds, which, because of their size and income requirements, are often forced into holding the top end of the FTSE 100.
According to FE Trustnet, the likes of Artemis Income, Fidelity MoneyBuilder Dividend, Invesco Perpetual Income, Invesco Perpetual High Income, Rathbone Income, SJP UK High Income and Threadneedle UK Equity Income all showed high correlation with each other over the past year.
Top heavy
This is reflected in a significant overlap in key positions.
For example, AstraZeneca is a top-10 holding in all these funds. It is a similar story for British American Tobacco – a top-10 holding for all but Artemis and Threadneedle – while GlaxoSmithKline is held by all but Invesco High Income.
Arguably the biggest story in the IA UK Equity Income sector in recent years has been CF Woodford Equity Income, launched on 2 June 2014.
