FE Alpha Manager and fund-of-funds expert David Coombs recently hit out at fast-growing portfolios as being “incredibly dangerous”, and the huge size of the £7.5bn M&G Recovery portfolio has been cited by some as exacerbating its recent soft patch.
While size can undoubtedly lead to problems for some fund managers – particularly with regard to liquidity – there are some who have handled inflows very well, and continued to deliver strong performance.
As Charles Stanley Direct’s Rob Morgan said in a recent FE Trustnet article, it tends to be managers with a lower turnover who handle inflows better, as their style is less affected by reduced flexibility.
Here are five funds that Morgan believes have handled inflows particularly well.
Invesco Perpetual High Income
"This is the prime example," said Morgan. "Woodford’s style hasn’t changed one bit since he started running money."
"He takes a big call on a sector and he sticks to it. This means he doesn’t need as much flexibility as others."
Rathbones’ chief executive Mike Webb said something very similar in an interview with FE Trustnet earlier this year: "If there is one manager who can run a £20bn fund, it’s Neil Woodford. He’s been running portfolios in exactly the same way all the way through."
According to FE data, Woodford’s Invesco Perpetual High Income fund is one of the largest portfolios in the entire IMA unit trust and OEIC universe, at £13.5bn. In the last three years, it has grown by around £3bn.
The fund is a top-quartile performer in its sector over three, five, 10 and 15 years, and since its launch back in 1988. It is second quartile over one year.
Performance of fund vs sector and index over 10yrs
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| Invesco Perp High Income | 19.35 | 45.18 | 45.6 | 273.36 |
| IMA UK Equity Income | 18.22 | 30.92 | 31.98 | 140.71 |
| FTSE All Share | 14.43 | 25.9 | 29.17 | 148.43 |
Source: FE Analytics
The fund has gone through regular short-term bursts of underperformance, which has led to criticism at times.
Woodford was bottom quartile in the market rebound of 2009 and 2010, for example, as a result of his lack of exposure to the cyclical stocks that bounced highest during the recovery.
However, this is typical of the manager's long-term style. Our data shows he had a poor patch in the late 1990s, during which time he underperformed his FTSE All Share benchmark in three of the four calendar years between 1996 and 1999.
Woodford’s current big off-benchmark bets are to pharmaceuticals and tobacco, which are the two biggest sector weightings in the High Income fund.
AstraZeneca, GlaxoSmithKline, British American Tobacco and Imperial Tobacco are all top-10 holdings.
The fund requires a minimum investment of £500 and has an ongoing charges figure (OCF) of 1.69 per cent.
AXA Framlington UK Select Opportunities
FE Alpha Manager Nigel Thomas (pictured) is one of the highest-rated stockpickers in the UK. He made his name at ABN Amro, joining AXA Framlington in 2002.
His UK Select Opps fund hit the ground running, delivering top-quartile returns of 124.36 per cent in the first five years after he took over.
The fund’s multi-cap approach proved popular with advisers and private investors, and mass inflows inevitably followed.
The fund has grown to £3.6bn recently, more than doubling in size over the last three years.
However, Thomas has maintained a multi-cap focus in spite of these inflows, which Morgan says is a result of his long-term approach.
"Because of the size of the fund, Thomas has to keep around 50 per cent in large caps, but this was the case anyway," he said. "It’s very much a multi-cap fund."
"He’s very buy-and-hold, keeping faith in stocks for many years. He’s had Imagination Technology in his portfolio for a long, long time, and it was a similar story with Xaar."
"He plants the seed and lets it grow, adding to it when he sees fit."
"Thomas is all about running his winners. He’s always said: 'don’t cut down your flowers to water your weeds.'"
Thomas’s top-10 holdings are very different from the average multi-billion pound UK equity portfolio.
Blue chips such as Glaxo and HSBC are in there, but he has big off-benchmark positions in FTSE 100 companies ITV and Next, and FTSE 250 firms Imagination Technologies, Filtrona and Rotork.
Nigel Thomas's top-10
| Name | Weighting (%) |
|---|---|
| ITV | 4.5 |
| Weir Group | 4.4 |
| Wolseley | 3.3 |
| Filtrona | 3.3 |
| Rotork | 3.1 |
| HSBC | 3 |
| Imagination Technologies | 3 |
| Next | 2.9 |
| GlaxoSmithKline | 2.9 |
| Prudential | 2.8 |
Source: FE Analytics
The five crown-rated AXA Framlington UK Select Opps fund is a top-quartile performer over three, five and 10 years.
It requires a minimum investment of £1,000 and has an OCF of 1.57 per cent.
Standard Life UK Smaller Companies
"The styles of Harry Nimmo and Nigel Thomas are very similar," said Morgan. "Nimmo is maybe the best example of a manager who runs his winners."
Nimmo has told FE Trustnet on a number of occasions that his low-turnover style enables him to run a £1bn small cap portfolio.
He recently expressed surprise at Alex Wright’s decision to close his Fidelity UK Smaller Companies fund, but pointed out that the manager has a higher turnover than he does.
Among Nimmo’s most successful long-term stock picks is ASOS, which he refers to as his best ever investment.
He bought the online retailer at 80p a share; at the time of writing, it is worth £30.90.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Like Woodford, Nimmo has gone through periods of underperformance during his time, but his long-term record is strong.
According to FE data, Standard Like UK Smaller Companies is up 412.94 per cent over 10 years, compared with 252.39 per cent from its IMA UK Smaller Companies sector average, which is also its benchmark.
The fund has an OCF of 1.69 per cent. It is soft-closed, but remains open on certain platforms.
JOHCM UK Equity Income
Clive Beagles and James Lowen’s JOHCM UK Equity Income fund is not one of the largest in its sector, but its mid cap focus means that it requires greater flexibility than many of its rivals.
Top-decile performance over one, three and five years has led to strong inflows, pushing assets under management (AUM) to £1.7bn.
However, Morgan believes the duo have done a good job at maintaining their multi-cap approach, shown by their very strong record over the last 12 months or so.
"The managers have stayed fairly active, and still have a lot of mid caps in there," he said. "It will be interesting to see if they close it soon, but so far so good."
JO Hambro said it would consider slowing inflows into the fund late last year, but has not yet done so.
Initially the group said it would close it at £1bn, but has since changed its mind.
Invesco Perpetual Corporate Bond
Morgan says fixed interest managers are not as impacted by large inflows, as liquidity is less of an issue, but adds that Paul Causer and Paul Read have still done a good job at managing the enormous AUM.
"These guys have got a huge amount of money under management, with combined assets approaching £15bn," he said.
"Fixed interest has less of an issue with liquidity, though things have got more difficult recently. Prior to the financial crisis there was deep liquidity, which is no longer the case."
"In 2011 when everyone else was running away from tier-one financials, these guys came in and hoovered a lot of it up, and were highly successful in doing so. It takes a lot of flexibility to do this."
Read and Causer’s biggest fund is the £5.8bn Invesco Perpetual Corporate Bond portfolio. It has received little in the way of inflows since 2010, with the bulk coming as a result of the pair’s strong performance in the early and mid-2000s.
According to FE data, the fund returned 77.63 per cent between January 2000 and January 2010, almost doubling the returns of the IMA Sterling Corporate Bond sector average.
The fund has been dominant in more recent years as well, significantly beating its peer group over a five-year period, with returns of 48.61 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The managers' performance has been strong in the last 12 months, thanks largely to their overweight in banks; FE data shows the fund is up 15.93 per cent over this period, compared with 13.5 per cent from its IMA Sterling Corporate Bond sector.
Invesco Perpetual Corporate Bond requires a minimum investment of £1,000 and has an OCF of 1.18 per cent.