The proliferation of index tracking funds, particularly for efficient developed markets, means that active funds really need to outperform to justify their higher costs, and why they should have a place in your portfolio. In the UK All Companies Sector, one of the largest fund sectors, a number of funds have disappointed.
- Leading returns
- Beats benchmark
- Thorough investment strategy
- Experienced managers
- Reliant on timing
However, there are also some gems that outperform the index by several times and make money through thick and thin - a very relevant ability in ongoing economic and market uncertainty. A prime example is Cazenove UK Opportunities Fund, which is one of the top 10 performing All Companies funds over one, three and five years - ahead of hundreds of its peers. It is also far ahead of the FTSE All-Share over those periods, chalking up more than 54 per cent over five years compared with 9.34 per cent from the index.
The fund aims to outperform the FTSE All-Share by 3 per cent on a calendar year basis over the medium term. Its manager, Julie Dean, achieves this by following the business cycle and aiming for less volatility than the fund sector average. Cazenove says understanding the economy's progress through recession and expansion allows Ms Dean to ascertain at what point the business cycle is, so she can take a macroeconomic view to decide which type of shares to hold, for example cyclical or defensive. "We believe stock returns are dominated by what phase the business cycle is in and moving towards," explains Cazenove.
IC TIP RATING | |
---|---|
Tip style: | GROWTH |
Risk rating: | HIGH |
Timescale | LONG TERM |
Ms Dean combines her macroeconomic views with analysis of individual companies and their earnings potential relative to the cycle. The fund's portfolio is relatively concentrated, currently 51 holdings with no sector or style bias, and this allows Ms Dean to rotate them throughout the business cycle.
She also thinks not owning the wrong stocks is as important as owning the right ones and will not buy shares just because they are in the benchmark index, the FTSE All-Share.
Cazenove UK Opportunities' strong performance has earned it a place on fund research company FE's Select 100 list of funds. "Ms Dean's approach to investing allows her to outperform in different market conditions while taking on limited risk," explains FE. "The fund has our maximum five crown rating. Its strategy has served it well over the past 10 years, although it is only since 2008 that it has reached its performance target of beating the FTSE All-Share by 3 per cent a year. For the past four years of benchmark-beating performance it has been particularly resilient in falling markets and has captured most of the upside in rising ones, too."
Another fund research company, Morningstar, has also awarded the fund its top ranking of five stars.
The major risk with this investment strategy is that it relies on Ms Dean and her team getting the timing of their decisions right. If they call the beginning of an economic recovery early the fund will move into unsuitable stocks, and while it will not necessarily perform badly, it could lag behind its peers in the UK All Companies sector. The fund has the potential to offset this by catching the upside faster than its competitors, but this still increases the uncertainty of its short-term performance. That said, Cazenove UK Opportunities has performed very strongly over the past few years, so if you have a long-term investment horizon and want to beat the business cycle, buy.
CAZENOVE UK OPPORTUNITIES B Acc (GB0031092728) | |||
---|---|---|---|
PRICE | 282.75p | STANDARD DEVIATION | 14.42% |
IMA SECTOR | UK All Companies | MEAN RETURN | 15.58% |
FUND TYPE | Open Ended Investment Company | SHARPE RATIO | 1.04 |
FUND SIZE | £668.62m | TOTAL EXPENSE RATIO | 1.57% |
No OF HOLDINGS | 51* | YIELD | 1.86% |
SET UP DATE | 03-Nov-89 | MINIMUM INVESTMENT | £1,000 |
MANAGER START DATE | 09-Dec-02 | MORE DETAILS | www.cazenovecapital.com/funds |
Source: Morningstar, *Cazenove Capital Management
Performance (%)
Period | Fund | Benchmark |
---|---|---|
1-yr | 30.17 | 14.9 |
3-yr | 57.71 | 28.23 |
5-yr | 54.16 | 9.34 |
Source: Morningstar. Performance data as at 18 October 2012
Top 10 holdings as at 30 September 2012
Melrose | 4.11% |
Howden Joinery Group | 3.94% |
Reed Elsevier | 3.9% |
Lloyds Banking Group | 3.84% |
Diageo | 3.53% |
GKN | 3.31% |
Sage Group | 3.31% |
Babcock International Group | 3.22% |
ITV | 3.05% |
Legal & General | 3.05% |
Sector breakdown
Basic materials | 1.62 |
Consumer goods | 6.84 |
Consumer services | 23.78 |
Financials | 22.26 |
Healthcare | 1.72 |
Industrials | 33.93 |
Oil & gas | 0.8 |
Technology | 4.13 |
Cash and other | 4.92 |