Five of the 10 best-performing funds over the last decade have a mid cap focus – including a tracker – while four of the top-10 have achieved the same feat over three and five years.
The stellar performance of the FTSE 250 has been a big driver of this performance. The index has thrashed the FTSE 100 over one, three, five and 10 years, and although it has been more volatile, it easily comes out on top on a risk-adjusted basis, measured by the Sharpe ratio.
Performance of indices over 10yrs
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| FTSE - 250 | 25.74 | 47.12 | 61.22 | 323.4 |
| FTSE - 100 | 15.34 | 29.35 | 27.91 | 138.17 |
Source: FE Analytics
While the index has proven a hard measure to beat, some funds have consistently added value to it, propping up the profits of investors who want exposure to this part of the market.
Here, following requests from many of our readers, we take a look at some of these in more detail.
Many UK funds have exposure to mid caps, and the success of this area has led to a number of large and small cap focused managers upping their weighting in recent years.
However, in the UK All Companies sector there are only 17 pure UK mid cap funds that take the FTSE 250 or FTSE 250 ex IT index as their benchmark.
Of the funds with a 10-year track record, the four crown-rated Franklin UK Mid Cap portfolio is the standout performer.
It is number-one in the sector over the last decade, with returns exceeding 465 per cent, compared with 347.28 per cent from its FTSE 250 ex IT benchmark.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
FE Alpha Manager Paul Spencer, who took over in 2006, has led the fund to top-decile returns in its sector, and significant outperformance of its benchmark, over one-, three- and five-year periods as well.
The fund has consistently performed with around the same volatility as the index. Spencer’s biggest rival has been Richard Watts’ Old Mutual UK Mid Cap fund, which has fallen only slightly short of Spencer's over all four time periods.
FE Research is a big fan of the Franklin fund, and includes it in the FE Select 100.
It likes Spencer’s simple process, which has reaped big rewards in recent years.
"The manager only invests in medium-sized businesses, typically worth between £250m and £2bn," the team said.
"He first eliminates the stocks he thinks are uninvestable, including investment trusts and companies that are poorly financed or run by unconvincing management teams."
"He also rules out whole sectors that he believes are in a permanent state of decline, such as high street retailers which are losing out to internet shopping."
"This leaves him with roughly 150 companies, which he ranks according to their potential total return, before investing in the top 10 per cent of this list."
"The resulting portfolio consists of companies the manager has a great deal of confidence in, with each stock expected to have a significant positive impact on performance."
Among Spencer’s biggest positions at the moment are industrial equipment rental company Ashtead Group, oil and gas supplier Hunting, and financial services company SJP.
No single stock has more than a 4 per cent weighting in the fund, while the smallest holding has no less than a 1 per cent position.
The team points out that Franklin UK Mid Cap tends to lose more than its peers and benchmark during falling markets, but that Spencer should be judged on his long-term record, given that he is a bottom-up stockpicker.
Andy Brough’s Schroder UK Mid 250 fund is the largest and highest profile of the mid cap offerings in the sector, but a very poor period between 2008 and 2012 saw it slip down the performance tables.
Concerns over the size of the fund are seen by many as a principal reason for its underperformance, and so significant outflows may be regarded as a positive development by those still invested in the fund.
Assets under management (AUM) have come down from £1.7bn to £1.3bn in the last three years, and performance has picked up; our data shows it is the best-performing UK mid cap fund over the last year, with returns of 34.16 per cent.
The Franklin UK Mid Cap fund is £781m in size, which the FE team says gives it adequate flexibility.
It requires a minimum investment of £1,000 and has an ongoing charges fee (OCF) of 1.58 per cent.
Spencer has been running small and mid cap portfolios since 1991, making him one of the most experienced managers in the field.
Performance of funds vs sector and index over 10yrs
| Name | 1yr | 3yr | 5yr | 10yr |
|---|---|---|---|---|
| Franklin UK Mid Cap | 24.68 | 59.6 | 94.71 | 465.05 |
| Old Mutual UK Mid Cap | 31.87 | 56.42 | 73.67 | 398.23 |
| Allianz UK Mid Cap | 24.11 | 43.81 | 54.03 | 278.88 |
| Schroder UK Mid 250 | 34.16 | 49.13 | 43.05 | 252.07 |
| Premier UK Mid 250 | 21.51 | 33.76 | 41.98 | 246.95 |
| Aberdeen UK Mid Cap | 26.82 | 53.25 | 62.74 | 222.79 |
| Royal London UK Mid-Cap Growth | 23.9 | 64.63 | 104.83 | N/A |
| Threadneedle UK Mid 250 | 25.65 | 50.08 | 61 | N/A |
| Neptune UK Mid Cap | 33.74 | 80.01 | N/A | N/A |
| Old Mutual UK Dynamic Equity | 28.05 | 69.57 | N/A | N/A |
| FTSE 250 Index | 25.74 | 47.12 | 61.22 | 323.4 |
| IMA UK All Companies | 18.4 | 32.04 | 30.42 | 144.74 |
Source: FE Analytics
Looking at funds that have been launched more recently, there are a number of strong contenders that have been more than a match for Spencer's.
Two funds stand out in this regard – the Royal London UK Mid-Cap Growth fund, and the five-crown rated Neptune UK Mid Cap fund.
Derek Mitchell’s Royal London portfolio is the best-performing UK mid cap fund over five years, and the only one that has delivered in excess of 100 per cent. The £148m fund is also very cheap, with an OCF of just 1.44 per cent.
However, the FE Research team’s pick of the bunch is FE Alpha Manager Mark Martin’s Neptune UK Mid Cap fund, which is number-one in the entire IMA UK All Companies sector over three years, with returns of 80.01 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The £88m fund is set to achieve its five-year track record in December this year, and is on course to top the sector over this period as well.
The FE Research team points out that Martin’s "three silo" approach enables his fund to outperform regardless of the economic environment, and also cuts down volatility.
"The fund is split into three 'silos': recovery, which is focused on companies that should do well if economic conditions improve; structural growth, which focuses on sectors such as healthcare that are growing despite a sluggish overall economy; and self-help stories, which consist mainly of struggling companies the manager believes have the potential to turn things around," the team explained.
"By keeping at least 20 per cent of the fund in each silo, Martin aims to ensure he can perform regardless of economic conditions."
"He believes he can add significant value through identifying undervalued businesses that are under-researched, and that holding these makes his portfolio less volatile than the market."
"He favours companies with easily identifiable earnings and strong balance sheets, and sectors with long-term growth potential."
FE data shows Martin has been successful in his attempts. Neptune UK Mid Cap is the least-volatile UK mid cap fund of the last three years, with an annualised volatility of just 12.48 per cent.
This makes it even less volatile than the FTSE All Share.
His fund outperformed the FTSE 250 index in the down market of 2011 and the up market of 2012, and only fell slightly short in the 2009 and 2010 rally.
The FE team sees the fund as a particularly good option for risk-averse investors, but points out it could be susceptible to underperformance if the market rally endures.
"The manager is a strong believer in following a rigorous value-driven discipline, only buying companies that he believes are undervalued by other investors," they said.
"This, along with the silo approach, is the key to the stability of the fund and offers a lower-risk method of accessing a traditionally high-risk part of the market."
"However, there will be periods when his value style will not perform as well, such as the first two and a half years of the fund’s life, and investors should be prepared for this."
Neptune UK Mid Cap requires a minimum investment of £1,000 and has an OCF of 1.67 per cent.
At the other end of the scale, funds such as Aberdeen UK Mid Cap, Premier UK Mid 250 and Allianz UK Mid Cap have disappointed in recent years.
Although their returns relative to the UK All Companies sector have been very strong – they are all at least top quartile over one, three, five and 10 years – they have underperformed consistently compared with their benchmark.
The Premier and Allianz funds have fallen short of the FTSE 250 ex IT index over one, three, five and 10 years, while the Aberdeen fund has underperformed over all but three years.
AXA Framlington UK Mid Cap, co-managed by legendary investor Nigel Thomas, is another option, but only has a one-year track record. It has started very strongly through, with returns of 31.76 per cent.
For anyone who wants to get access to the FTSE 250 via a tracker, HSBC FTSE 250 Index and BlackRock Mid Cap UK Equity Tracker are both available to retail investors. The former has a much longer track record.