The best of British: This year's fund winners so far

OBSR investment research analyst Richard Whitehall examines the top performing funds in the UK All Companies sector over the short and long term

Investors in UK equities in 2011 have so far suffered from a year of significant drawdown, with the IMA UK All Companies sector average showing a loss of 12.3% to the end of September, underperforming the FTSE All-Share index which has fallen by 10.9%.

Given the major macroeconomic factors that have dominated newsflow during the year it is perhaps surprising to look back and remember that the FTSE All-Share index was 3% ahead over the first six months of the year.

As we now know sovereign debt concerns in the eurozone periphery spread to Italy and Spain significantly raising fears as to the viability of the currency; economic recovery also looked to have stalled in both the US and the UK and there were few signs that growth in emerging markets would be of a level to compensate for any slowdown in the developed world.

All of these problems crystallised early in the second half of the year. Consequently the UK equity market drastically discounted for expected falling revenues and during the third quarter of 2011, the FTSE All-Share index fell by 13.5%.

Defence to the fore

Divergence in sector performance has been significant. Defensive sectors have been at the fore, led by a desire for investors to access cash-generative companies with sound balance sheets as well as low exposure to the economic cycle.

To the end of September, the FTSE tobacco sector has been the best performing sector, having risen by 2.7%, followed by utilities and the pharma & biotech sectors. Whereas pro-cyclical FTSE sectors such as mining and industrials have performed poorly, returning losses of 30.2% and 15.2% respectively.

Given the uncertainty relating to the financial sector in the eurozone, as well as regulatory issues, it is no surprise that the banking sector has also been a notable laggard, falling by 23.5% over the first three quarters of the year. With such variance in sector performance and heavy style-biases, fund performance so far this year has been dominated by these factors.

However investors looking towards the top of the UK All Companies league table should also consider fund performance in a longer-term context. Below is a selection of OBSR rated funds that have performed relatively well in the first three quarters of 2011 but also have strong long-term track records.

Outperformers

Investec UK Special Situations, managed by Alastair Mundy, provides investors with a well-diversified portfolio comprising predominantly large and medium-sized UK equities and is managed using the traditional principles of value investing. Mundy has managed the fund since August 2002 and is supported by the Contrarian Equity team which he leads.

The fund is run in-line with Mundy’s investment philosophy that entails purchasing shares in strategically well-placed companies when sentiment towards them is at or near its worst and selling them as a combination of improving profitability and re-evaluation of their long-term prospects takes place. The philosophy leads the fund to make changes ahead of the wider market, which is reflected in the performance profile.

The fund tends to outperform during periods of equity market drawdown as has been seen this year and in 2008, but performance can lag the sector towards the end of a bullish equity market, as seen in 2007 and 2010. Over Mundy’s nine year tenure the fund has outperformed the FTSE All-Share index by 1.9% per annum.

JO Hambro UK Opportunities has performed strongly since inception, outperforming the FTSE All-Share by 3.25% per annum, by being relatively successful at protecting investor capital during equity market downturns.

The fund, which has been managed by John Wood since November 2005, is a concentrated portfolio managed with conviction. The manager is directly supported by Ben Leyland and Michael Hogg and additionally they are able to draw on the investment experience of the wider team of UK equity fund managers within JOHCM. The primary concern is to generate positive absolute returns rather than merely focusing on relative returns against the benchmark.