Whether it is surging towards the psychological barrier of 7,000 or selling off dramatically, the UK’s blue chip index is the headline grabber. Of course, there are plenty of reasons why that is the case.
It is an index of the UK’s largest companies and a proxy for the performance of the whole UK stock market. However, while the FTSE 100 has been gently gathering pace since the June sell-off, the FTSE 250 has reached its highest ever level.
Yesterday the mid cap index broke through the 15,000 point hurdle and has continued to strengthen. At the time of writing, it is at 15,111.
Ben Willis, head of research at Whitechurch, says that one of the reasons why the FTSE 250 index has gone under the radar is because it is less internationally oriented than its large cap counterpart.
Although there is an array of mid caps with overseas exposure and earnings power, experts agree that sectors such as UK housebuilders have driven the index’s performance recently – the likes of Barratt Developments, Persimmon and Taylor Wimpey have all returned more than 50 per cent year-to-date.
Although it is regarded as a more risky area of the market, according to FE Analytics, investors who bought into the FTSE 250 index three years ago would have seen returns of 64.68 per cent compared with the FTSE 100’s 41.47 per cent.
Performance of indices over 3yrs
Source: FE Analytics
The index has returned more than 30 per cent over one year. However, given its recent stellar performance, is there any upside left for investors who want to buy into mid caps now?
Willis (pictured) does not think so. He says that investors should really think twice about adding to their exposure now because there is a good chance they have already missed the high returns. "We have been focusing on small and multi-caps instead of purely focusing on mid cap funds," he said.
"When you look at that area of the market, it is on average trading on 20x earnings while the FTSE 100 is something like 13 or 14x. It’s hard to gauge, but the underlying valuations now look stretched."
"That’s the problem though, if investors had bought the index 18 months ago, they would have seen great returns. We missed that allocation, but would we be buying mid cap funds now? Probably not," he added.
His thoughts are echoed by Jason Hollands, managing director of business development and communications at Bestinvest, who says that investors who want some exposure to the mid cap story should buy a multi-cap fund for now.
"We have even seen that some mid cap managers have expressed concerns that prices have become quite expensive," he said.
"There is no doubt that it is a more cyclical area and as we are seeing better economic data, that performance could continue. But valuations are certainly not looking cheap and it is a risk to focus too heavily on such a narrow area of the market."
"We prefer multi-cap funds. They will naturally have exposure to the FTSE 250 but can also dip into other areas of the UK market," he said.
Hollands’ preferred choice is the £931m Liontrust Special Situations fund, which is headed up by the FE Alpha Manager duo of Anthony Cross and Julian Fosh.
Fosh and Cross’s five crown-rated fund currently has 25 per cent in the FTSE 250. However, the management team’s largest weighting by market cap is to the FTSE 100, which makes up 43 per cent of the portfolio.
Liontrust Special Situations has been the third best-performing fund in the highly competitive IMA UK All Companies sector since its launch in November 2005.
According to FE Analytics, it has returned 180.42 per cent over that time, beating its benchmark – the FTSE All Share – by more than 100 percentage points in the process.
Performance of fund vs sector and index since Nov 2005
Source: FE Analytics
Liontrust Special Situations also boasts top-quartile returns over three and five years. However, that performance has waned in recent times and it is currently languishing in the bottom quartile of the sector over 12 months.
Fosh and Cross aim to invest in companies that have an economic advantage, which they describe as businesses with intangible strengths that their competitors struggle to reproduce.
The main three the duo look out for are a company’s intellectual property, distribution channels and repeat business, although they also consider its culture and brand power.
Liontrust Special Situations has an ongoing charges figure (OCF) of 1.88 per cent and requires a minimum investment of £1,000.
Although UK mid caps may be looking pricey, advocates of the sector say that not only does it have a higher growth profile than the FTSE 100, but companies within the index are M&A targets for large multi-national businesses.
Both Hollands and Willis say that it is unclear if the FTSE 250 can continue to rise. Hollands highlights the AXA Framlington UK Mid Cap fund for investors who either believe the index can continue to outperform or who want to buy but are waiting for a correction.
He likes the fund because it is more nimble than other funds in the mid cap space, with just £16.7m worth of assets under management. He is also a fan of its manager Chris St John.
AXA Framlington UK Mid Cap is a top-quartile performer in the IMA UK All Companies sector since its launch in March 2011, with returns of 59.2 per cent. More importantly, it has considerably outperformed the FTSE 250 ex IT index over that time.
Performance of fund vs sector and index since Mar 2011
Source: FE Analytics
St John takes a thematic point of view when choosing a company to invest in, whereby he picks businesses than can best benefit from a theme or trend.
His largest sector weighting is to industrials, making up 35 per cent of his fund; Ashtead and Travis Perkins feature in his top-10 holdings.
AXA Framlington UK Mid Cap has an OCF of 1.7 per cent and requires a minimum investment of £1,000.
