The UK All Companies sector paints a confusing picture instead of fufilling its original intention to allow investors to compare like with like
The UK All Companies sector is an increasingly unwieldy beast. The purpose of the IMA sectors was to allow investors to compare like with like and, in most cases, this works pretty well. But the UK All Companies sector includes a wide range of different management styles, market cap exposures and value/growth biases. Investors have no real way of telling whether a fund is at the top because the manager is a great stockpicker, or because he has had exposure to the mid-250, for example.
Advisers and fund management groups intermittently agitate for more informative sectors from the IMA. This is becoming more pressing with the advent of Ucits III and more widespread use of derivatives. There are problems to any restructuring, but the UK All Companies sector amply highlights the problems if no action is taken.
A clearer picture
RealAdviser's sister title Investment Week undertook some research to try and sort the wheat from the chaff in the sector. They divided the sector into various fund types, where it was obvious from the fund title. This threw up seven distinct types of funds (see table) - mid-caps; special situations; focus; value/recovery; growth & income; blue chips and fund of funds.
The mid-cap funds were top. But it neatly highlighted the problems of the wider sector. Old Mutual UK Select Mid Cap was top of this category, returning 167% over three years. It is currently second in the UK All Companies sector. In contrast, the Aberdeen UK Mid Cap fund is bottom of the mid-cap funds, having returned 127.4% over the same period, but still looks good compared to the wider sector - it currently lies 18th.
The performance of Special Situations/Select Opportunities portfolios was less clear-cut. There were 43 of this type of portfolio and 25 had a track record of three years-plus. Only two were fourth quartile over the three years - Hiscox Opportunities and Threadneedle UK Select. The Threadneedle fund returned just 62.7% over the period and was 257th in the sector (out of 259 funds) - a salutary lesson as to how unconstrained investing is not always a profitable enterprise.
That most of the funds performed well was probably a function of the relatively high mid and small-cap exposure of many of these funds. The top fund was Standard Life UK Opportunities. It returned 154.3% over the period and is seventh in the wider sector. New Star Special Situations, JP Morgan UK Dynamic and Cavendish Opportunities were also top performers among this type of fund.
But the most diverse group of funds in terms of performance were the alpha/focus/aggressive range. There were 16 portfolios, of which 11 had three-year track records. This has been one of the more fashionable areas of investment, as fund management groups have sought to add value through conviction portfolios.
And for some, this approach has worked brilliantly - most notably for Ed Burke, manager of Invesco Perpetual UK Aggressive. His fund is up 193.6% over the past three years, top of the UK All Companies sector. But the relative riskiness of these funds is amply illustrated by performance at the other end of the range. The Britannic UK Focus languishes at the other end of the spectrum, having generated just 73.2% over the same period and ranking 220th.
Blue chip funds, as might be expected given the relatively lacklustre performance of FTSE 100 stocks over the past three years, are at the bottom. The average blue chip fund is fourth quartile. The Investec UK Blue Chip is top, but still lies in the third quartile at 175th. It returned 78.3% over the three years. In this, more than any of the other mini-sectors, fund managers found it hard to transcend their market-cap bias. Bottom was M&G Blue Chip, 247th in the wider sector, but only 8.3% behind the Investec fund returning 70% over three years.
The research also highlighted some of the trends in the industry. For example, there are now 18 multi-manager funds listed within the sector, of which seven do not have a three-year track record. In single strategy funds, the trend has been towards more specialist, multi-cap portfolios, with the majority of the launches in the opportunities/special situations section. On the back of the market's preference for value, there have also been a number of launches in the value/recovery space.
The message is, as always, caveat emptor. The UK All Companies sector hides a multitude of different approaches. The top-performing funds could be top-performing because they are fantastic funds, or they may just have been lucky enough to be in the right place at the right time. This is an important distinction for the discerning fund buyer.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till