Play a future recovery with Axa Framlington UK Mid Cap

With the coronavirus crisis and Brexit complications both looking far from done, investors might rightly be tempted to steer clear. But those with a longer view could do well by picking up bargains in a cheap and unloved market that could one day rebound. One way to do this would be via mid-cap stocks: traditionally more resilient than small-caps with better growth potential than their larger peers, they have struggled in recent years but could benefit handsomely when the waters clear.

Only a handful of UK funds state an explicit bias to mid-caps, and one that stands out is Axa Framlington UK Mid Cap (GB00B64W4Q70). Christopher St John, who has managed the fund since its 2011 launch, looks for companies with some basic advantages: the ability to grow organically, pricing power, high barriers to entry in their sector and a relative lack of debt.

Mr St John, a chartered accountant, tends to take a relatively bottom-up approach rather than being guided solely by external trends, with a focus on quality growth stocks. The fund’s biggest holdings at the end of June included specialist media company Future (FUTR), home furnishings retailer Dunelm Group (DNLM), residential property group Grainger (GRI) and Spirent Communications (SPT), a telecoms testing business.

Importantly the fund has a good level of flexibility. Unlike some of its peers, this fund is not restricted to investing solely in FTSE 250 stocks, meaning the team can pick up promising smaller companies or continue to run their mid-cap winners if they graduate to the FTSE 100. A fairly benchmark-agnostic approach also allows the team to look past the structural biases of the FTSE 250 if needed, for example by having less of a hefty allocation to the financials sector.

But some self-imposed guidelines do lessen the risk of the fund being managed recklessly. The team cannot build a position of more than 4 per cent in any one company, and tends to buy between 60 and 80 stocks to achieve a degree of diversification. The team’s ability to deviate from the fund's mid-cap benchmark is also limited because of a requirement to have at least 70 per cent of assets in the FTSE 250 and no more than 15 per cent in FTSE 100 stocks at any time.

This is reflected in the fund’s recent allocations. While the managers had money allocated to stocks in the FTSE 100, FTSE Aim and FTSE SmallCap at the end of June, just under 73 per cent of assets sat in FTSE 250 companies. The fund had 67 holdings, with its top position representing just 2.7 per cent of assets.

As analysts at fund ratings agency Square Mile recently put it, Axa Framlington UK Mid Cap is “a sensibly managed fund that seeks to meet its investment objective in a steady, reliable and repeatable fashion rather than shoot the lights out”, and racier funds with greater potential for both big gains and substantial losses do exist. It may also prove unsuitable as a core UK equity holding, given its specific focus. But this fund has tended to deliver steady returns and could prove a reliable play on a market that might one day return to form in dramatic fashion. Buy. DB