Ed Legget’s £586m fund is number-one in its sector over the longer period, with returns exceeding 116 per cent.
Over the same time, the average UK growth fund is up just 30.42 per cent, while the All Share has returned 31.73 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Unlike the majority of the top-performing UK managers of recent years, Legget has a much better record in rising markets than falling ones.
In fact, this is something of an understatement: according to FE data, Standard Life UK Equity Unconstrained was the 11th-worst performing fund in 2008 in a sector comprising almost 300 funds, with losses of 41.05 per cent, and the fifth worst in 2011, with losses of 20.47 per cent.
By contrast, the fund was the very best performer in 2009 and 2012, and the fifth best in 2010.
Year-on-year performance of fund vs sector and index 2008 to 2013
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) |
|---|---|---|---|---|---|---|
| Stan Life Inv UK Equity Unconstrained | 16.38 | 44.14 | -20.47 | 38.5 | 99.17 | -41.05 |
| IMA UK All Companies | 11.59 | 15.05 | -7.04 | 17.53 | 30.4 | -31.96 |
| FTSE All Share | 11.4 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 |
Source: FE Analytics
Given the market turbulence investors have witnessed in recent years, it is natural that a fund’s ability to protect against the downside is in high demand.
According to a recent FE Trustnet poll, 71 per cent of our readers said they would rather a fund outperform in falling markets than rising ones.
This is, of course, understandable, given that funds have to work twice as hard to recoup losses; if a manager loses 50 per cent one year, they would have to return 100 per cent the next year to break even.
However, there are some – including Legget – who have performed so well during up markets, that their severe downward losses have not mattered. The manager says the very best investors have to be committed to their convictions, which requires a huge degree of patience and nerve.
"In this game, you’ve got to believe in something to a very high level," he said.
"I personally look for companies whose ability to generate cash-flow is underestimated by the market."
"If the share price falls, there has to be something wrong with the company – I’m not just going to sell because market sentiment has shifted."
"If you go through 2008 to 2012, you’ve had big changes in sentiment as a result of top-down macro concerns. The reactions at some points implied that the world was going to end, and I didn’t subscribe to that view."
"It’s when you get the big top-down fears that you get the best opportunities."
Legget admits that he did not expect the 2008 crash to be as severe as it was, but says it allowed him to pick up "tremendously cheap" stocks that fuelled stellar outperformance during the rebound.
On the Lehman crash, he said: "This was a top-down call that I got wrong. However, we saw a lot of opportunities in the aftermath."
"We were seeing stocks fall 20 per cent a day, on no news. The next day they fell 10 per cent, the next another 10 per cent, and at that point a lot of people just said: 'I’ve had enough, get me out.'"
"However, within three weeks those stocks were going the other way. You’ve got to stick to your convictions, rather than playing it safe and buying BAT [British American Tobacco]."
The manager points to GKN, which he bought during the depths of 2008, as a good example.
"GKN is the biggest supplier of car parts in the world, and over a two-week period it halved," he said.
"If you didn’t like the stock, you were basically saying that no one will ever buy a car again, because this is a company that undoubtedly benefits from car sales."
"If no-one buys any more cars, you’ve got a lot more to worry about than GKN. It would mean economies would cease to exist."
"We bought it at 90p, it fell to 50p, but we bought more as it fell and made a lot on the upside."
Performance of stock over 5yrs
Source: FE Analytics
According to FE data, GKN is up more than 600 per cent since March 2009.
Legget bought into a number of rights issues in late 2008 and 2009, which he says required a particularly high level of conviction. However, the vast majority worked out very well, illustrated by Standard Life UK Equity Unconstrained's stellar run in 2009.
"When you buy in to a rights issue, you have to double up," he said. "We did this with Rio Tinto, Xstrata, Cookson, British Land and others."
"We needed to put 4 per cent of the portfolio in Cookson in January [2009], and it went up 40 per cent the next week. It then became 6 per cent of the portfolio, so we scaled down because the price wasn’t as interesting."
Legget (pictured) says he saw similar levels of value last summer, which again he took full advantage of.
"People seemed to lose all process of rational thought," he continued. "They got caught in a fear of falling shares prices and uncertainty."
"Barclays fell 50 per cent on the Libor scandal, which was ridiculous."
"If you look at the number of sell-side analysts that changed their view from 'buy' or 'hold' to 'sell' back then, but who are now 'buy' – even though the share price has doubled – you’d be amazed."
While Legget often buys more of a stock when its share price falls, he tends to sell when prices rise, because he focuses so strongly on valuations.
An example of this is FTSE 250 company International Personal Finance, which has been one of the best performers in his portfolio since 2009.
"I’ve had to scale it back because it became such a big part of the fund," he added.
Legget says the unconstrained approach of the fund, which allows him to stray away from his benchmark without limit, and an above-average time horizon have helped the fund achieve such successful results.
"If you look at the best investors – Warren Buffett and George Soros – they have long-term time horizons," he said.
"They might look like they’ve got things wrong, but they’ve made an awful lot of money overall."
"Standard Life does allow managers to have a longer time horizon than most. I’ve never been pressured in to making a decision, or changing anything – even if it’s underperformed."
Standard Life UK Equity Unconstrained requires a minimum investment of £500 and has an ongoing charges fee (OCF) of 1.9 per cent.