Top 100 Funds: UK Equity growth (8 Funds)

NEW ENTRANT: Man GLG Undervalued Assets (GB00BFH3NC99)

Value investing – buying equities where the price seems lower than you think it should be – has not done well for much of the past decade. But many commentators and analysts think the investment environment is changing, meaning that value could once again become a successful way to invest.

A good way to exploit value in the UK market could be MAN GLG Undervalued Assets Fund. It launched five years ago, but manager Henry Dixon and his team have refined the investment strategy over 15 years. The fund has performed well, beating the FTSE All-Share index over one and three years, putting it in the first quartile of the IA UK All Companies sector in terms of performance over those periods.

Mr Dixon and co-manager Jack Barrat seek companies with strong cash and asset characteristics that are unloved by the market, and aim to construct a portfolio that is better value than the broader market. They like companies where the estimated replacement cost exceeds market value and which are priced below their estimated intrinsic value as defined by earnings.

The fund has over half its assets in small and mid-caps so could experience periods of volatility, and funds that take a value approach can undergo periods of underperformance. So if you invest in this fund you should be prepared to hold it for five years or preferably longer and have a high enough risk appetite to tolerate this.

See our tip in the issue of 25 May for more.

Liontrust Special Situations (GB00BG0J2688)

Liontrust Special Situations has beaten the FTSE All-Share index over one, three and five years, over which period it is in the top quartile of the IA UK All Companies sector in terms of performance. The fund has an outstanding performance record and is typically among the top-performing funds in its sector.

Liontrust Special Situations’ longstanding managers, Anthony Cross and Julian Fosh, can invest in any companies in the FTSE All-Share regardless of their size or sector, and the fund also has an allocation to Alternative Investment Market (Aim) shares. This means it could be more volatile than funds that largely invest in stable large-caps.

The fund’s managers look to invest in companies with a durable competitive advantage that allows them to defy industry competition and sustain a higher-than-average level of profitability for longer than expected.

Castlefield CFP SDL UK Buffettology (GB00BF0LDZ31)

Castlefield CFP SDL UK Buffettology is among the top-performing funds in the IA UK All Companies sector over one, three and five years. Its manager, Keith Ashworth Lord, aims to replicate the investment philosophy of highly regarded US investor Warren Buffett, holding 25 to 35 companies that have enduring operating franchises, high returns on equity, strong free cash flow and experienced management teams. His investment decisions are based on analysis of companies, free from adherence to industry sectors or stock limits.

A downside of Castlefield CFP SDL UK Buffettology is its relatively high ongoing charge of 1.28 per cent, but its strong, consistent outperformance more than compensates for this.

Law Debenture Corporation (LWDB)

Law Debenture Corporation is ranked in the AIC Global sector, but has around 70 per cent of its assets in the UK. This is in line with its investment policy, which states it must invest between 55 per cent and 85 per cent of its assets in securities listed on the UK market. As the UK faces uncertainty for reasons including its departure from the EU, getting exposure to this market via a fund that can vary its weighting to it could be useful. But because of this you will need to carefully monitor this trust’s geographic weighting as it could change considerably.

The trust is run by highly experienced manager James Henderson, who has made very strong returns with the various funds he runs. Law Debenture Corporation’s NAV returns have beaten those of most UK All Companies sector investment trusts and the FTSE All-Share index over three and five years.

As well as investing in shares and funds, Law Debenture Corporation runs a professional services business that provides administration and governance services – something that differentiates it from other UK investment trusts. The income from this boosts its revenues, enabling it to pay decent dividends, and it has a higher yield than many Global and UK All Companies investment trusts. The income from the professional services business means this can be achieved without having to focus on dividend-paying shares, so the trust’s managers can invest in shares with good growth prospects.

The trust’s very low ongoing charge of 0.43 per cent means it is one of the cheapest active funds available to UK investors.

Old Mutual UK Mid Cap (GB00B1XG9482)

Old Mutual UK Mid Cap has outperformed the FTSE 250 index and the IA UK All Companies sector average over three and five years, making around double the return, and putting it among the top-performing funds in its sector over those periods.

Its manager, Richard Watts, takes a flexible approach, prioritising attractive returns across the entire business cycle by investing in about 40 to 60 companies, primarily UK mid-sized ones. He looks for companies that seem to have the strongest growth potential and the greatest hidden value (see our recent fund tip, IC, 31 August 2018).

Henderson Smaller Companies Investment Trust (HSL)

Despite its name, Henderson Smaller Companies Investment Trust has over half its portfolio in FTSE 250 shares. And this policy has served it well: the trust has outperformed the Numis Smaller Companies ex Investment Companies and FTSE 250 indices over one, three and five years by quite a margin. It also beats the average return for UK smaller companies investment trusts over those periods, and the returns of the other mid-cap-focused investment trusts.

“Henderson Smaller Companies has a strong long-term record via a ‘growth at a reasonable price’ approach,” says Ewan Lovett-Turner at Numis Securities. “It is one of the largest, most liquid UK smaller company trusts, and an attractive core holding for investors seeking exposure to this asset class.”

Henderson Smaller Companies has a performance fee on top of its management fee. However, its ongoing charge of 0.42 per cent is very low, so even with the performance fee added to this, at the end of its last financial year they only amounted to 0.99 per cent. There are also a number of caps, including a limit on the total management and performance fees payable in any one year of 0.9 per cent of the average value of the trust’s net assets during the given year.

Although not a high-yielder, Henderson Smaller Companies has increased its dividend for 15 consecutive years, and in its last financial year its total dividend of 21p per share was a 17 per cent increase on the year before.

Marlborough UK Micro Cap Growth (GB00B8F8YX59)

Marlborough UK Micro Cap Growth has a strong record of beating the FTSE Small Cap index and is in the first quartile of the IA UK Smaller Companies sector in terms of performance over longer periods.

The fund is run by highly regarded smaller companies investor Giles Hargreave, alongside Guy Feld, backed by an investment team of more than 10. They mainly invest in companies with a market capitalisation of £250m or less at the time of purchase, and a considerable proportion of the fund is in companies with a market cap below £150m.

They look to invest in businesses where the growth potential is not yet reflected in their share price.

The fund typically holds around 250 stocks (283 at the start of August) with even the largest positions rarely representing more than 2 per cent of the fund’s assets. The diversification helps to manage stock-specific risk.

The fund is over £1.2bn in size, which can be a problem when investing in very small companies. However, this does not seem to have affected performance so far and the fund’s assets are spread across many holdings, making it less likely that the managers would have to avoid a stock for fear of holding too large a percentage of it.

BlackRock Smaller Companies Trust (BRSC)

BlackRock Smaller Companies Trust has outperformed its benchmark, Numis Smaller Companies plus AIM ex Investment Companies, in each of its past 15 financial years. It can invest up to 50 per cent of its assets in Alternative Investment Market (Aim) shares, which differentiates it from a number of other smaller companies funds. At the end of July it had around 48 per cent of its assets in this area. The trust has been run by Mike Prentis since 2002, and in April it was announced that Roland Arnold would become a co-manager. This is unlikely to result in great change as Mr Arnold has been working with Mr Prentis as part of the BlackRock UK small and mid-cap team since 2005. 

The trust has increased its dividend every year for 15 years, and although not a high yielder due to its strong capital growth, pays out an attractive level of income. For example, in its last financial year, it paid 26p a share, an increase of 23.8 per cent on the previous year.

Since 1 March this year the trust has no longer levied a performance fee, and revised its management fee to 0.6 per cent on the first £750m of the trust’s total assets less liabilities, reducing to 0.5 per cent thereafter. The trust has assets of over £800m. The trust’s board estimates that if the new fee arrangements had been in place during its last financial year, the ongoing charge plus performance fee would have been 0.77 per cent rather than 0.93 per cent.