Whatever their reputation, UK stocks have been on a tear both before and since President Donald Trump’s April “liberation day”, and funds have captured plenty of the upside. The average Investment Association UK All Companies fund has made a 55 per cent return over the five years to 29 July, versus 67 per cent for its investment trust equivalent.
Small and mid-cap funds have rallied especially hard since April and started to close the gap with their larger peers. But it’s funds with a focus on income, value and large caps that have made the biggest gains over five years. Funds in UK equity income sectors are, on average, up by even more than their growth siblings.
At the top of the performance table, the value-minded income trust Temple Bar (TMPL) has returned 184 per cent over the period, and some specialists are now taking profits after such big gains.
Other names frequently discussed in the IC have made more than 150 per cent, from Artemis UK Select (GB00B2PLJG05) and Artemis SmartGaarp UK Equity (GB00B2PLJM64) to Ninety One UK Special Situations (GB0033063636). A good number of other funds, meanwhile, have also made more than 100 per cent.
There is certainly merit to the idea of banking some of these gains by cutting back on positions now. On the other side of the coin, it’s also worth noting the growing cost of sticking purely with funds that, even if through no real fault of their own, have generated lacklustre returns.
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Five-year return figures can easily be distorted by one or two big years, but even so the gap between the top and bottom UK equity funds over this period is now huge. Almost all UK equity strategies are in the black for the period, but some sit on some very meagre returns, including a few that have commanded a loyal following in the past.
Take £330mn SDL UK Buffettology (GB00BF0LDZ31). It once had more than £1bn in assets but has only returned around 10 per cent over the five years. The renowned Marlborough Special Situations (GB00B659XQ05) has returned only slightly more.
These are both funds that once boasted big returns and attracted many investors but, in part due to their allocations to small and mid-cap companies, have struggled in recent times. A similar peer, Liontrust Special Situations (GB00BG0J2688), has returned just 28 per cent.
Funds with more defensive approaches also lag their peers, with Lindsell Train UK Equity (GB00B18B9X76) up by around a quarter over the period. Evenlode Income (GB00BD0B7D55) is on a somewhat better but still underwhelming 37 per cent.
I mentioned that small and mid-cap shares have staged a fierce recovery in recent months, and this may well be the moment where funds that delve into these market segments begin to outperform again.
But the sheer difference in returns between the best and worst funds over this period reminds us that backing a single name can come with a substantial opportunity cost.
It can make sense to diversify within a particular geography to make sure you have exposure to different investment styles and company sizes. At times this might feel like overkill, but sometimes one fund is not enough to cover a given market – particularly if its investment style is out of fashion.