Woodford Equity Income, Threadneedle UK Equity Income and Neptune Mid Cap are among the UK funds that Walker Crips portfolio manager Gary Waite is continuing to back across his model portfolio range. 
Walker Crips’ Alpha: r² model offering is a MSCI WMA indices benchmark-aware range of portfolios that aim to achieve somewhere around 3 per cent plus per year against the relevant index.
As such, while the asset allocation moves rarely, with tilts rather than wholesale changes enforced, it is important for the strategies to hold core funds in many exposures. Below, FE Trustnet looks at its core funds in the UK equities basket.
First up is FE Alpha Manager Neil Woodford’s LF Woodford Equity Income fund, which he holds despite well-publicised stock selection issues and recent poor performance.
“We still hold Woodford. It has been very popular to come out in the press and say ‘we have sold Woodford’ but for us it is a diversifier,” Waite said.
“At the heart of Alpha: r² is risk management and analysis and we find with this fund in the aggregate portfolio it increases expected return and reduced expected risk therefore it is a good trade for us.
“It is not a massive holding but it is a core holding because of the risk metrics.”
Since its launch in 2014, the fund has been a bottom quartile performer in the IA UK All Companies sector, returning 23.5 per cent versus the FTSE All Share’s 34.26 per cent and average peer’s 35.16 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
This is in large part due to a disappointing 2016 and 2017, as the fund made a top quartile return in its first full calendar year (2015).
Over much of this period, Woodford’s (pictured) value style has been largely out of favour, while stock-related issues with Provident Financial, AA and others also hindered performance.
However, Waite said the holdings in the portfolio are “diametrically opposite” to other income funds in the range, meaning that it is a diversifier and a hedge against other funds that are heavily invested in more cyclical sectors.
“It is one of those things where, yes, his performance has been bad but you run the risk of doubling-up that bad performance by selling at the wrong time when potentially defensive holdings themselves might outperform the market in a downturn,” he added.
“It gives us something that we don’t see elsewhere in the market, so as a small holding in our aggregate portfolio I am very happy with it.”
Additionally, he said that the full transparency of the Woodford portfolio allows him to know exactly what he is buying.
“It gives us some comfort that we can see 100 per cent of his portfolio that we know there is no style drift and there is nothing in there that we wouldn’t expect from him,” Waite said.
“And if there are stories about Provident Financial or Capita, he knows as well as we do that he is going to come out in the press and that gives us more colour on what he is thinking.
“For us he has been fairly courageous and the question is not why he is doing it but why others are not. I am sure there are a lot of other big names out there that are holding similar kinds of stocks but they hide behind their top 10 holdings rather than full transparency and in this day and age everyone should be pushing for full transparency.”
Alongside the Woodford Equity Income fund the Alpha: r² portfolios include Threadneedle UK Equity Income and JOHCM UK Equity Income.
Both funds have been long-term top quartile performers, returning 203.17 and 129.5 per cent over the last decade, as the below chart shows.
Performance of funds vs sector and benchmark over 10yrs
Source: FE Analytics
Waite said: “Threadneedle UK Equity Income is in that bucket of large-cap core defensive funds where it is not a huge weighting but it is something in the portfolio which acts as a portfolio anchor.
“We are quite happy to hold it and even though in certain markets it underperforms, with markets at current levels awe are relatively defensive and are more likely to add to it and Woodford in these markets than take some out or exit completely.”
The £4.1bn fund is managed by Richard Colwell, who told FE Trustnet last week that investors should be brave and back the UK.
Meanwhile, JOHCM UK Equity Income, run by James Lowen and Clive Beagles is distinct from the other two funds as it is very commodities-driven with a particular focus on oil & gas and financials sectors.
“It participates in that [cyclical] kind of environment and now you have [US president Donald] Trump antagonising Iran it seems a relatively safe bet that oil prices will trade higher from these levels,” he noted.
Alongside the large-cap funds, Waite highlighted that the portfolios also include both the Neptune UK Mid Cap fund, run by FE Alpha Manager Mark Martin, and Old Mutual UK Mid Cap – headed up by FE Alpha Manager Richard Watts.
“We do like the fact that we have specialist managers in different parts of the sectors. We believe there is a good information advantage to dedicated small- and mid-cap managers,” Waite said.
However, it also shows the importance of having a longer time horizon when it comes to constructing a portfolio.
Both are top quartile performers over the long term. Since its launch the £508m Neptune fund has returned 400.59 per cent but has struggled more recently, in the bottom quartile over one and three years as domestic stocks struggled following the Brexit referendum in 2016.
Additionally, his preference for quality stocks and eye on the downside has meant that the fund has failed to fully capitalise on the cyclically-rising market more recently.
Performance of funds vs sector and benchmark over 3yrs
Source: FE Analytics
Meanwhile, the Old Mutual fund is in the top quartile over one, three, five and 10 years as it has more of a value tilt.
Indeed, stock selection favours companies where the manager and team feel there is the potential for either an upgrade in earnings, a rerating of the stock's valuation or sustained level of above average earnings growth.
“The problem with time horizons is that everyone is so short-term now that it is difficult for anyone to underperform for whatever reason without someone looking over their shoulder thinking their money is going to be pulled,” Waite said.
“If we pay a premium for a manager and they underperform then we will cut them but it is the old time horizon argument.
“Over three or five years then I am sure that most mid-cap managers should outperform but over [shorter time frames] it is more difficult because in certain market conditions they can materially underperform.”