Investors who bought BlackRock UK Special Situations Fund (GB0005805022) three years ago are unlikely to be smiling now. The fund was once a top performer, but it has slumped to the fourth quartile of its peer group, the Investment Management Association (IMA) All Companies sector, over one and three years. Over the same periods, you'd have been better off in a FTSE All-Share Tracker fund, which would also have cheaper management fees.
But despite this, Roland Arnold, co-manager of BlackRock UK Special Situations Fund, is adamant that UK mid-cap companies are simply having a blip and will recover. "Stick with good quality mid caps for long enough and they are sure to beat large caps," he says.
His explanation goes as follows. He says the share prices of mid-cap companies - particularly "quality" companies with strong balance sheets - have diverged from what is actually "going on" in the companies. For example, clothing retailer Ted Baker (TED) has reported top-line growth of 20 per cent, but this has yet to be reflected in the value of its shares, which are trading at £17.52 a share, down from the start of the year when they were trading at over £23 a share. "There is only so long that the share price doesn't react in this situation," he said. "But it is difficult to put a timescale on it."
He's heavily overweight in industrials with a 23.7 per cent allocation, compared to 10 per cent for his benchmark, the IMA All Companies sector, a theme he's been playing for a number of years. He admits this has negatively impacted the fund, but he knows why (the political climate has been out of favour and growth has been weak). But he's certainly not planning on trimming back now.
He's also got 13.6 per cent in financials - considerably less than the peer group average of 22.8 per cent. And his third biggest sector is oil and gas in which he has 13.3 per cent of his portfolio invested, slightly less than the peer group (15.1 per cent).
One problem he's faced with companies in these sectors has been "investment tourists" who swooped in when mid-cap share prices were soaring. These were mainly foreign investors and large-cap managers moving down into mid caps to try and get additional returns. More recently, they have been pulling out of the sector, which has put even more downward pressure on the shares, and caused further pain for investors.
| Roland Arnold CV Roland Arnold has co-managed BlackRock UK Special Situations Fund since 2012. Mr Arnold's primary responsibility is managing small and mid-cap UK equity portfolios, with a sector emphasis on technology. Mr Arnold's service with the firm dates back to 2000, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. Prior to joining MLIM in 2000, Mr Arnold worked at a UK retail bank as a performance and credit analyst. He has a BA in economics and management from Leeds University. |
Because Mr Arnold is a stock-picker, he is less concerned about the macro economic outlook than the running of the individual stocks he owns. He actually views isolated disasters within his stocks as the biggest single threat to the fund. And he's speaking from bitter experience. One of his companies, ITE (ITE), the Russia-based entertainments business has had its share price "battered" by the conflict between Russia and the Ukraine which began earlier in the year, the impact of which has had a negative effect on the fund as a whole.
But despite all this, Mr Arnold remains positive. He is especially optimistic about the recent surge in mergers and acquisitions (M&A) activity among UK large-cap companies, as he believes the action is about to trickle down to mid caps. And if this doesn't happen by the end of 2015, he'll be bitterly disappointed, he admits.
But despite his excitement, he is avoiding the temptation to pick companies because he thinks they're potential targets for a takeover. He says that by having a preference for companies with strong accounts, he will naturally benefit from M&A deals as and when they happen.
However, when it comes to initial public offerings (IPOs), he is very wary. He has been disappointed by the quality of the deals coming through this year, complaining that they aren't a patch on last year. In 2013, he bought Royal Mail (RMG) but sold it very quickly, as well as entertainment company Merlin (MERL), which he still owns.
