It’s well-known that UK mid-caps surged ahead of blue-chips and outperformed smaller company stocks in 2015, with the FTSE 250 beating the FTSE 100 and FTSE Small Cap indices by 14.31 and 1.82 percentage points respectively with a total return of 12.99 per cent.
As such, many investors who haven’t already done so could be looking to increase their exposure to mid-caps to reap the benefits from their strong performance in the hope that it will continue – but of course, past performance is no guide to future returns.
According to FE Analytics, a composite of all the actively managed UK funds benchmarked against the FTSE 250 has comfortably doubled the IA UK All Companies sector’s performance over three years. It has also more than doubled the IA UK All Companies sector over five years.
Performance of composite vs sector over 5yrs
Source: FE Analytics
However, it is vital for investors to get under the bonnet of any fund they’re looking to invest in as there are numerous UK funds that are benchmarked against the FTSE All Share but have still delivered top performances powered by having a mid-cap bias.
By the same token, there are funds that are benchmarked against the FTSE 250 that that have underperformed the IA UK All Companies sector average over varying time periods.
To make the process easier, FE Trustnet has taken a look at three of the strongest and highly-rated UK performers with a mid-cap focus and asked a panel of investment professionals their thoughts on buying into them at the moment:
Managed by FE Alpha Manager Paul Spencer for the last decade, the £1bn Franklin UK Mid Cap fund has delivered a top-quartile return over one and three years and a top-decile return over five and 10 years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The manager (pictured) adopts a long-term approach when selecting stocks and maintains a highly-concentrated portfolio of FTSE 250-only stocks, which currently stands at 39 holdings. 
An interesting feature of the fund is that, stylistically, there is no specific growth or value focus as Spencer believes a pragmatic approach must be taken when selecting from stocks in such a wide investment universe.
“We like Spencer’s flexible management style and the depth of his analysis. It is also reassuring that Franklin are mindful of potential capacity concerns, with the fund now exceeding £1bn of assets,” Martin Bamford, managing director of Informed Choice and chartered financial planner, said.
“Franklin UK Mid Cap is certainly the standout performer among funds which focus on mid-caps within the UK All Companies sector. Paul Spencer has been managing this fund for a decade and his performance has been consistently strong during that time.”
“During the past year, when the sector has fallen by an average 2.83 per cent, his fund is up by 5.97 per cent, which demonstrates the strength of his management and the resilience of mid-caps during the recent challenging market conditions.”
In an article published earlier this week, Spencer told FE Trustnet that he is reducing his exposure to domestic-facing UK companies at the moment and increasing his exposure to overseas companies due to stretched valuations and less upside potential.
“We share the concerns recently expressed by Paul Spencer that some parts of the market look fully valued, after holding up very well during recent equity market volatility. We would not actively seek to allocate client money to UK mid-caps, although we still believe some allocation via mainstream UK equity funds remains important for long-term investors,” Bamford added.
Franklin UK Mid Cap has a clean ongoing charges figure (OCF) of 0.82 per cent.
FE Alpha Manager Mark Martin’s Neptune UK Mid Cap fund is another top-performer, having delivered top-decile returns over three and five years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It is able to invest in the largest 50 stocks from the FTSE Small Cap index as well as those that are listed on the FTSE 250 and Martin divides the portfolio into three categories: economic recovery, structural growth, and corporate turnarounds. Each category must make up a minimum of 20 per cent of the fund.
“The Neptune UK Mid Cap fund is a fund that I have known for about four years,” Dan Boardman-Weston, head of portfolio management at BRI Wealth Management, said.
“I remember analysing it back when it was about £8m in size and was scored very highly on most metrics one could look at. When we became more bullish on the mid-cap area of the market it was the fund that stood out.”
“I really like Mark’s three silo approach that looks at economic recovery, structural growth and corporate turnarounds. This system has been shown to perform well in the previous market environments.”
Another feature of the fund that sets it apart from its peers, according to Boardman-Weston, is its low level of volatility.
According to FE Analytics, it is outperforming its average peer on annualised volatility, Sharpe ratio, which measures risk-adjusted returns, and maximum drawdown, which is the most money an investor would have lost having bought and sold at the worst possible times, over one, three and five years.
While Boardman-Weston rates this particular fund highly, it should be noted that he holds no UK mid-cap exposure currently due to high valuations across many of the stocks.
The four crown-rated fund, which is £725m in size, has a clean OCF of 0.82 per cent.
FE Alpha Manager Luke Kerr’s Old Mutual UK Dynamic Equity fund is also benchmarked against the FTSE 250 index and is able to hold both long and short positions in UK equities that are outside of the FTSE 100 index.
Currently, the £394m growth fund has 59 holdings and its five largest weightings are Paysafe Group, Just Eat Workspace Group, St James’s Place and Autotrader.
“We like the Old Mutual mid-cap team and the small-cap team, they’re a really good desk with some good people on there,” Hargreaves Lansdown’s Laith Khalaf said.
“Old Mutual UK Dynamic Equity is on our Wealth 150 list, alongside the UK Mid Cap and the UK Smaller Companies funds, which reflects how confident we are in the firm.”
“The mid-cap and smaller company space is really an area where talented managers can make a difference to returns, because you’re looking at areas that are potentially higher-rewarded and tend to be less-well covered by analysts, so there’s more scope for managers to bring an information advantage to the table by doing their research properly.”
Since the five crown-rated fund’s launch in 2009, it has provided a total return of 225.47 per cent, outperforming its average peer and benchmark by 129.14 and 55.43 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
To the end of 2015, it has also achieved a top-decile return during four out of six full calendar years and has a top-decile alpha generation since launch as a result of Kerr’s ability to hold short positions.
Old Mutual UK Dynamic Equity has a clean OCF of 1.07 per cent.
