Investment: OBSR's top UK fund picks

OBSR’S Ruli Viljoen scrutinises the top funds in the UK All Companies sector.

With 18.6% of funds under management (FUM) of the IMA sectors, the UK All Companies still dominates the landscape. If to this figure we add in UK Equity Income and UK Smaller Companies too, the FUM increases to 29.2%. However this masks a rapidly changing landscape as the UK All Companies sector also represented the worst selling sector in net retail sales terms in five calendar months in 2010.

Conversely FUM in the Global Sector would appear to be on the rise, increasing from 6.3% at the end of 2005 to 7.8% at the end of 2010 and representing the best selling sector in December 2010.

Sector in focus

The most recent data indicates the IMA UK All Companies sector comprises some 300 funds; of these 25 have FUM of less than £10m and 93 have FUM of less than £50m. The largest fund in the sector is the M&G Recovery fund with FUM of around £6.5bn and thereafter the next three largest funds are index trackers with FUM collectively of £11bn.

Fidelity Special Situations and Schroder UK Alpha Plus also feature among the largest funds while there are 127 funds with FUM between £100m and £1bn. From a performance perspective the average fund in the sector has outperformed the FTSE All Share in three out of the last five calendar years, highlighting the extent to which many funds rely on an allocation to mid-caps to generate strong performance as the only two in which they underperformed were also the years in which the Hoare Govett Index (representing the mid-cap stocks) underperformed the FTSE All Share.

The M&G Recovery fund is a specialist UK equity portfolio which offers a multi-cap approach with an emphasis on companies which are out of favour, in difficulty or whose future prospects are not fully recognised by the market. Tom Dobell has managed the fund since March 2000. His approach is contrarian in nature and long term in its investment horizon, an important aspect when considering the size of this fund.

We believe that the manager’s inherent investment style is well suited to this fund’s mandate and that he has the experience and resources required to gain a deep understanding of the companies in which he invests.

Additional contrarian investors that we would highlight include Fidelity Special Situations manager Sanjeev Shah who aims to identify stocks where there appears to be a valuation disconnect and significant upside potential. This fund too has a bias towards medium and smaller sized companies.

Since assuming responsibility for the management of the fund in January 2008, Shah has successfully navigated the fund through some of the most difficult market environments and his contrarian investment style is in keeping with what investors have come to expect from this fund, which was previously managed by Anthony Bolton.