For this reason a growing number of investors are sceptical of the value of holding large-cap stocks through funds.
Many use index trackers or ETFs to get exposure to this part of the market, the “core” of their portfolio, and active funds to get access to mid-caps and small-caps, the “satellite” part of their investments.
The belief is that this is a “cheaper” option, as investors lose less of their gains each year through charges.
However, funds that have a high weighting to large-cap stocks can sometimes add a significant amount of value which more than makes up for their higher charges.
Here we look at five examples of funds that predominately invest in the larger end of the market and yet behave differently from the passives in important ways.
They are multi-cap funds but with significant active positions in the FTSE 100 index, offering an alternative way to get large-cap stocks into your portfolio.
All performance figures are after the deduction of fees.
AXA Framlington UK Select
FE Alpha Manager Nigel Thomas’ Axa Framlington UK Select Opportunities has a tracking error of 8.24 per cent to the FTSE 100 despite having 56.83 per cent in the index.
The tracking error measures the relative variability of the fund’s returns to those of the index, giving investors an idea how much it depend.
The fund is top quartile among retail UK All Companies funds over three, five and 10 years despite this large-cap bias, with the majority portfolios ahead of it much more heavily invested in mid-caps.
The fund’s biggest holding is in ITV, which makes up 5.2 per cent of the portfolio but just 0.32 per cent of the FTSE 100 index.
All but one of the fund’s 10 largest positions are FTSE 100 companies, the exception being Weir Group, an engineering firm that manufactures the valves used in shale gas production.
Thomas has run the fund since 9 September 2002, and our data shows he has made 280.78 per cent for his investors over that time as the FTSE All Share has made just 161.92 per cent. Picking a tracker at the inception of the fund would have been an expensive decision.
Performance of fund versus sector index over 3yrs
Source: FE Analytics
Inflows over the last three months have been huge, with the fund taking on around £110m, likely due to investors looking for an alternative for the Schroder UK Alpha fund which Richard Buxton left earlier this year.
The fund has a minimum initial investment of £1,000 and has ongoing charges of 1.61 per cent.
Jupiter UK Special Situations
Ben Whitmore’s £1.27bn Jupiter UK Special Situations fund is another to predominantly invest in the FTSE 100.
The top 10 is entirely made up of large cap stocks, with GlaxoSmithKline, BP and Vodafone heading the list.
The five FE-crowned fund has done very well since Whitmore took over in 2006, and site in the top quartile over five years as a result.
The fund has made 81 per cent over that time compared to the 49.9 per cent returned b ythe FTSE 100.
Performance of fund versus index over 3yrs
Source: FE Analytics
FE Trustnet last week carried comments from Whitmore explaining that he believes that fund managers need to take positions away from their benchmarks to beat them, and he will be taking that approach to the Jupiter Income Trust that he took over from Anthony Nutt this year.
The fund has a minimum initial investment of £500 and has ongoing charges of 1.76 per cent.
Liontrust UK Growth
This fund, run by FE Alpha Manager Anthony Cross and Julian Fosh, has strongly outperformed the UK market over the past three years, making 47.73 per cent as the FTSE All Share has made 34.84 per cent. It has five FE crowns.
It currently has 55 per cent in the FTSE 100 and 30 per cent in the FTSE 250. Regression analysis suggests stock-picking has been very important to the fund’s returns and it has a high tracking error of 7.84 per cent to the FTSE 100, third-quartile for the sector.
One of the factors behind its outperformance has been the 0 per cent weighting to the basic materials sector that includes the miners.
The FTSE 350 Mining index has lost 17.82 per cent over the past three years as the FTSE 350 has made 34.32 per cent, so avoiding it has been a major factor for many funds’ beating the index.
Performance of fund versus indices over 3yrs
Source: FE Analytics
Cross and Fosh have nothing in this sector, whereas 7.82 per cent of the FTSE 100 index is made up by these companies.
The fund also has nothing in the utilities sector, which makes up 4.34 per cent of the FTSE 100, and nothing in Telecoms, a further 7.29 per cent of the index.
It is available with a minimum initial investment of £1,000 and has ongoing charges of 1.68 per cent.
JOHCM UK Opportunities
The £1.2bn JOHCM UK Opportunities fund is largely focused on the FTSE 100, with most of its top 10 coming from that index. Data from Style Research says it and a higher weighting to large caps than its peers. The tracking error to the FTSE 100 is 8.36 per cent.
It has nevertheless managed to outperform the majority of UK equity funds over three and five years.
Although its returns are second-quartile, investors need to bear in mind that many funds in the IMA UK All Companies sector are entirely mid-cap in nature or have taken very significant weightings to that sector as it outperforms.
Performance of fund versus sector and FTSE 100 over 3yrs
Source: FE Analytics
The managers are big believers in using valuations to measure stocks, which is likely to make much of the mid-cap sector off-limits given its recent spike in valuations.
An unusual top 10 holding is FTSE 100 engineer Smiths Group, which many analysts believe to be undervalued on a price to earnings ratio of 15.41.
JOHCM UK Opportunities has ongoing charges of 1.3 per cent before the application of a performance fee of 15 per cent of the portfolio’s outperformance of the FTSE All Share. The minimum initial investment is £1,000.
Lindsell Train UK Equity
The £698m Lindsell Train UK Equity fund has five FE crowns after substantially outperforming its peers and the market over one, three and five years. In fact, over five years it has the fourth best returns in the IMA UK All Companies sector of 140.28 per cent while the FTSE All Share has made just 55.3 per cent.
It is a concentrated portfolio of just 24 stocks, with the largest stocks being FTSE 100 companies.
The fund shows what is possible when you pick exactly the right stocks, although advocates of passive funds may claim FE Alpha Manager Nick Train (pictured) is just lucky.
Diageo, Unilever, Schroders, Pearson and Hargreaves Lansdown are among the FTSE 100 companies Train holds in much larger weightings than the benchmark.
The fund is available through a number of platforms and has ongoing charges of just 0.8 per cent.
