UK equity funds that concentrate their portfolios at the bottom of the market-cap spectrum have been able to keep pace with rallying global equities while UK stocks slid downhill over recent months, Trustnet research shows. 
Although stock markets rallied immediately after the initial coronavirus sell-off – thanks to trillions of stimulus being unleashed by governments and central banks around the world – they have slowed significantly over the past three months.
Between 5 June and 11 September, the MSCI AC World index made a 5 per cent total return (in sterling terms) as positives such as stimulus packages, the reopening of economies after lockdown and hopes of a vaccine were balanced against negatives like the giant fall in economic activity and fears of a second coronavirus wave.
Some areas have done very well, with Chinese equities standing out with a gain of almost 14 per cent on the back of the early opening of the country’s economy and the belief that it will be rebound stronger than most. Most parts of the globe have seen their stock markets grind higher over this period.
But not the UK.
FE Analytics shows the FTSE All Share index was down 5.32 per cent between 5 June and 11 September, meaning it has underperformed global equities by more than 10 percentage points in just over three months.
Performance of indices since 5 Jun
Source: FE Analytics
The reasons for the country’s underperformance are not hard to identify.
The UK’s response to the coronavirus pandemic was less effective than many of its neighbours, leading to a high death rate and an economic hit much deeper than others experienced. Added to this is the ongoing Brexit saga, which recently reared its head once more and put the renewed threat of a ‘no deal’ exit at the forefront of investors’ minds.
However, UK equity funds have managed to perform relatively well against this negative backdrop.
Our data shows the average fund in the IA UK All Companies sector made a loss of 2.7 per cent between 5 June and 11 September, falling about half as much as the FTSE All Share. The IA UK Equity Income sector, which has been hit with a swathe of dividend cuts, has an average loss of 4.32 per cent.
Meanwhile, the average fund in the IA UK Smaller Companies sector posted a total return of 3.09 per cent. This reflects the generally stronger performance of small-caps – while the FTSE 100 dropped 5.99 per cent over the period we’re looking at, the FTSE Small Cap index eked out a 0.23 per cent gain.
But which individual funds have managed to make money while the FTSE All Share was failing to rise?
According to FE Analytics, 299 funds out of the 388 that reside in the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors have posted a better result than the FTSE All Share’s 5.32 per cent loss since 5 June.
Some 104 of these have made a positive total return over the period in question and 29 – which can be seen in the table below – are up more than 5 per cent, thereby beating gain seen in the MSCI AC World index.
Source: FE Analytics
Given the fact that smaller companies have outperformed in the last three months, a lot of these funds are from the IA UK Smaller Companies sector – including the only fund to make more than 10 per cent: LF Miton UK Smaller Companies.
The £66.3m fund, which is managed by Gervais Williams and Martin Turner, is also the strongest performer in its peer group over 2020 so far with its 35.44 per cent return. It had been one of the sector’s worst funds in 2019, but bounced back strongly this year because of a put option on the FTSE 100 that allowed it to bank profits when the market dropped in March.
In addition, LF Miton UK Smaller Companies has benefitted from a number of stock-specific success stories. One that the managers highlighted earlier this year is Synairgen, which surged after clinical results showed one of its therapeutics can significantly improve the outcome of Covid-19 patients.
Its focus on the AIM market (close to 80 per cent of the portfolio is held in companies listed here) has been a bit help as the FTSE AIM has risen 5.72 per cent since 5 June.
In a recent update, Williams and Turner said they expect this to continue: “In the past, at a time when most quoted stocks were delivering attractive investment returns, UK small-cap strategies could happily restrict their investment universe to the larger end of the investment universe and compete effectively.
“With the major disruption to market trends currently, we believe that there will many fewer mainstream small- and mid-cap companies that will be in such a favourable position going forward.
“In time, we anticipate that small-cap portfolios will be drawn down the market capitalisation bands into various micro-cap quoted companies that can continue to deliver good cash payback – driving up their valuations, and further enhancing their ability to use their equity to acquire assets from distressed sellers.”
This trend of smaller companies outperforming over the recent months can be seen in the other funds to make it onto the above table.
The best performing member of the IA UK All Companies since 5 June is James Baker and Edward Booth’s £722.3m MI Chelverton UK Equity Growth fund, which is up 7.71 per cent.
Chelverton Asset Management is a small-cap specialist and this fund invests solely in companies that are outside of the FTSE 100 – some 70 per cent of the portfolio is in stocks with a market cap of less than £500m.
Other IA UK All Companies funds on the above list have a focus outside of large-caps, such as ASI UK Mid Cap Equity, VT Downing Unique Opportunities and Unicorn UK Growth.
No funds in the IA UK Equity Income sector have returned more than 5 per cent for the period under consideration.
The best performance has come from DMS Charteris Premium Income, which made 4.02 per cent. This fund does focus on large-caps, but has minimal-to-no exposure to under-pressure airlines, retail or the oil sector, while being overweight materials firms (which have performed strongly) and holding overseas earners that benefitted from the weak pound.