CF Woodford Equity Income, Old Mutual UK Mid Cap and CF Miton UK Multi Cap Income are among the new UK funds to have been added to the FE Invest Approved List as of the latest re-balancing. 
The FE Research team reshuffle their list of recommended funds twice a year and thanks to changing dynamics within the equity market, a move to reduce the number of duplicated strategies and other quantitative trends, a number of top-rated funds have been removed this time around.
These include the likes of Aberdeen Asia Pacific Equity, Invesco Perpetual Income, Stewart Investors Global Emerging Market Leaders, Schroder Recovery and Jupiter Merlin Income.
“We've been quite stringent this time round and have had a bit of a clear out. Our focus has been to reduce duplication and so some big names have been dropped because they're too similar. For example – Invesco Perpetual Income has been taken out, but we have kept in UK Strategic income – because they are quite similar,” Rob Gleeson, head of FE Research, said.
“We have also reduced exposure to classic multi asset as the demand has fallen. This also reflects the move to risk targeted fund solutions which we will be adding in due course.”
All in all, 25 funds were removed from the FE Invest Approved list but 13 have been brought in this time around.
In this article, we will focus on the UK equity funds that have been included and Charles Younes, research manager at FE Research, outlines why they have made the grade.
Much has been written about FE Alpha Manager Neil Woodford’s new fund, which has performed strongly since its launch in June 2014.
However, the FE Research team were wary of bringing in the ex-Invesco Perpetual manager’s £8.3bn fund immediately after inception due to concerns surrounding how running a start-up boutique may affect performance.
Nevertheless, following some changes at the group, Younes says he and the team are happy to recommend the immensely popular portfolio.
“While it doesn’t have a crown rating, it scores for an FE Alpha Manager rating and all three AFI portfolios,” Younes said.
“I went to Oxford to have a meeting with the team and obviously there was no change to the process [since his time at Invesco Perpetual] but there is a very collegiate approach. We feel Woodford Investment Management is now a solid company as there are no longer all these departures, for example, when the ex-head of risk left.”
“Now, all those people who were not set have now left and I feel the team is settled. It means we are not afraid of putting the fund on the short list, but that’s why it took us one or two years to ease our fears about Woodford setting up his own boutique.”
According to FE Analytics, CF Woodford Equity Income has been the best performing IA UK Equity Income portfolio since its launch with returns of 18.89 per cent. As a point of comparison, the FTSE All Share has lost 3.36 per cent.
Performance of fund versus sector and index since launch
Source: FE Analytics
Though the fund is one of the go-to options in the sector, concerns have been raised about its current 3.48 per cent yield which is only just within the Investment Association’s peer group criteria. CF Woodford Equity Income has a clean ongoing charges figure of 0.75 per cent.
Another fund to have been added from the sector is CF Miton UK Multi Cap Income, which has also been one of the best performers in the peer group over recent years thanks to the fact it has largely avoided FTSE 100 stocks.
“We have also added CF Miton UK Multi Cap Income, which has benefitted from Gervais Williams and Martin Turner’s decision to keep the fund away from large-caps. We also like this more diversified approach to UK equity income, plus its focus on growth,” Younes said.
According to FE data, the five crown-rated fund (which is £582m in size) currently holds just 15.4 per cent in the FTSE 100 but 30.7 per cent in AIM-listed stocks, 19.9 per cent in the FTSE 250 index and 17.3 per cent in small-caps. The managers also use put options on the FTSE 100.
Since its launch in October 2011, CF Miton UK Multi Cap Income has topped the sector with returns of 110.62 per cent and has also nearly tripled the FTSE All Share’s gains in the process.
Performance of fund versus sector and index since launch
Source: FE Analytics
The fund has also beaten the sector and index in every calendar year since launch, including 2014 which was a difficult year for UK investors outside of large-caps. It is outperforming so far in 2016 as well.
As a result, CF Miton UK Multi Cap Income has had the second lowest maximum drawdown in the sector since launch as well as the best risk-adjusted returns (as measured by its Sharpe ratio) and the lowest annualised volatility over that time.
The fund has a clean OCF of 0.82 per cent.
Younes continued: “It’s a similar story in the IA UK All Companies sector. We have seen many funds with a growth approach away from large-caps included this time around.”
One of those is FE Alpha Manager Richard Watts’ Old Mutual UK Mid Cap, which has been brought in so that the FE Research team still has exposure to the group’s highly-rated UK equity desk.
“Old Mutual UK Mid Cap scored very highly - we used to include Luke Kerr’s Old Mutual UK Dynamic but it is hard-closed now. Therefore, by holding the mid cap fund, we have the same exposure to the team that we rate highly.”
Watts has managed the £2bn Old Mutual UK Mid Cap fund since December 2008.
According to FE Analytics, it has been a top-decile performer in the competitive IA UK All Companies sector over that time with gains of 268.30 per cent, although it has narrowly underperformed against its FTSE 250 ex IT benchmark in the process thanks to a relatively poor 2008 when the fund failed to rebound as hard as the market after the global financial crisis.
Performance of fund versus sector and index
Source: FE Analytics
That being said, it has now beaten the index in each of the last five calendar years meaning it is outperforming both the sector and its benchmark by a comfortable margin over rolling one, three and five year periods.
The fund, which is heavily weighted towards the consumer services and industrials sectors, has a clean OCF of 1.1 per cent.
The final fund in this article has been brought back onto the FE Invest Approved list having been removed in September 2013.
Younes says the five crown-rated fund, which is co-run by Colin McLean and FE Alpha Manager Margaret Lawson, has been reintroduced thanks to its high scores as a result of the managers’ growth approach and high weighting to mid-caps.
The fund only weighs in at £134m, but Lawson has been at the helm for more than 10 years.
Since she took over the fund in October 2005, SVM UK Growth has been the sector’s seventh best-performing portfolio in the sector with gains of 189.88 per cent while the FTSE All Share has made 80.10 per cent.
Performance of fund versus sector and index under Lawson
Source: FE Analytics
The fund is also top decile and beating the index over one, three, five and 10 years. Though the fund has tended to rally harder than the market during rising markets (thanks largely to its historical bias outside of the FTSE 100), it significantly outperformed in the crisis years of 2007 and 2008.
Currently, Lawson and McLean have 51.9 per cent in mid-caps, 4.4 per cent in small-caps and 47.6 per cent in large-caps. Its top 10 holdings include Ryanair, Paddy Power, Reckitt Benckiser, Ted Baker and ITV.
SVM UK Growth has a clean OCF of 1.08 per cent.
