Every year Money Observer runs the rule over 11 popular fund sectors from which it picks the Premier League team. Find out which investment vehicles made the cut in: Premier League of Funds delivers super returns.
Funds Premier League: Top four UK funds
Four UK funds made this year's Premier League line-up, including one debuting sector in targeted absolute returns. With more than 50 funds to compete with, Cazenove Absolute UK Dynamic came out on top of the new sector.
With three-year returns of 52.8%, compared to the 13% sector average, the UK fund was proving popular, so much so that it has since been closed to new money.
That offering and Neptune UK Mid Cap, after recording three consecutive years of first-quartile annual returns, both scored a perfect "three" in their respective sectors.
Below, we discover why Neptune's manager searches for overlooked and undervalued companies and how Cazenove UK Equity's pragmatic management is generating great returns.
We also assess how Henderson UK Smaller Companies manager Neil Hermon has bagged a near 100% gain over three years.
UK all companies sector - Neptune UK Mid Cap
The £136.5 million Neptune UK Mid Cap fund invests mainly in FTSE Mid 250 companies and the 50 largest companies of the FTSE Small Cap index.
Manager Mark Martin explains that his investment approach involves putting at least 20% of the fund into each of three "silos": recovery, structural growth and turnarounds.
"I only invest in companies where I see significant upside for the current share price on the basis of conservatively estimated future cash flows," he adds.
Martin searches for overlooked and undervalued companies - "which tend to be particularly prevalent among small caps" - among those small-cap stocks with strong management teams and balance sheets.
I only invest in companies where I see significant upside for the current share price on the basis of conservatively estimated future cash flows."
As he observes: "These latter features are particularly important among small caps, as their ability to access debt and equity capital markets is typically weaker than that of large-cap companies."
He does not put himself in any particular "style" box, stressing the importance of adaptability; but if he had to categorise his approach, he would describe it as contrarian.
Thus he bought into the housebuilding sector in 2009 when it was trading at rock-bottom levels in the wake of the credit crunch and housing-market collapse of 2008.
"This gave us a margin of safety on valuation grounds: even if book value had fallen further, there would at least have been some buffer in that we had paid such a low multiple," he adds.
Martin's biggest success stories over the past three years have hinged around mergers and acquisitions, with (typically overseas) buyers acquiring a number of companies held in the fund at significant premiums.
Takeover targets have included Dana Petroleum, diagnostics firm Axis Shield, plumbing specialist BSS, engineering firm Tomkins and transport company Arriva.
UK equity income sector - Cazenove UK Equity Income
This £427.5 million Cazenove fund, managed by Matt Hudson, aims to achieve a high level of income together with long-term capital growth.
Hudson describes his management philosophy as "pragmatic", involving a top-down investment approach rooted in the business cycle.
He says: "We think about how individual stocks are affected and impacted by where we are in an economic cycle."
At the moment the portfolio is underweight in large cap defensive holdings.
It is important to move the portfolio towards cyclical stocks, which typically have higher levels of gearing and are sensitive to the improving economy, when you start the recovery phase."
"I currently have a cyclical skew to industrials, consumer cyclicals, and financials," he explains.
"It is important to move the portfolio towards cyclical stocks, which typically have higher levels of gearing and are sensitive to the improving economy, when you start the recovery phase."
A strong performer for the fund over the past three years, and the single most positive contributor to performance in 2013, has been the British airline easyJet (EZJ).
Hudson points out that in recent years the airline has been taking market share from existing "flag carriers" as a result of its lower-cost operating model and strong capital discipline, which meant it was able to start paying a dividend and deliver a special return of capital.
Another leading performer is investment company Melrose (MRO), a specialist in engineering firm acquisitions and turnarounds.
Its most recent purchase involves the German utility meter specialist Elster, which Hudson says looks very promising as margins continue to expand further. BT (BT) has been another favourite over three years.
"BT is a former highyield stock that has been re-rated on the back of strong cost control and addressing legacy issues; it's now seeing an improvement in top-line growth which should support double-digit dividend growth over the medium term," comments Hudson.
UK smaller companies sector - Henderson UK Smaller Companies
Manager Neil Hermon has a well established track record; he has been involved in the UK smaller companies space since 1993 and has been managing the £104.4 million Henderson UK Smaller Companies fund since 2002.
"We use a growth-based investment approach; valuation is important to us," he explains.
"We are long-term investors - the average holding period for investments in the portfolio is around five years. Our best investments are worth running for the longer term, as they're the smaller companies that will grow into successful larger ones."
The portfolio is heavily mid-cap biased: around 75% is invested in FTSE 250 companies (which have done on average around twice as well as the wider FTSE 350 over the past three years), 18% in small caps and around 7% invested in the Alternative Investment Market.
Top performer over the last 12 months has been the US-focused and UK-listed plant hire company Ashtead Group (AHT).
"The [housing] sector will strengthen further into 2014 on the back of government schemes."
"Ashtead has done well on the back of a structural shift in the market, and has seen very strong growth in profitability," Hermon says.
He points out that the industry has had a good run over the last 24 months, helped by an upturn in the housing market underpinned by government initiatives such as Help to Buy.
"This sector is clearly seeing improvement, with increases in both transaction activity and pricing, and that will strengthen further into 2014 on the back of government schemes.
Given the natural momentum in the housing market, we think these companies are set fair to perform well."
Targeted absolute return sector - Cazenove Absolute UK Dynamic
"Our approach is all about bottom-up stock-picking, so we try and ignore all the macro noise," observes John Warren, co-manager of Cazenove's Absolute UK Dynamic fund.
Instead, he and Paul Marriage focus on researching companies and talking to them about "what they're seeing and doing", to pick long-term winners.
The fund is focused on absolute returns, aiming to make money when the market is rising, and not to lose it when it falls.
We always keep a fully populated short book even if we're very bullish as a whole."
Its bias towards small and medium-sized companies - unusual in this sector - has been a central platform of its outperformance in the past three years.
Moreover, says Warren, "we always keep a fully populated short book even if we're very bullish as a whole."
Consequently, when the market lost 7% in the turbulence of May 2012, his fund was flat.
He explains that the fund achieves its goals by keeping its long book biased to small and mid caps, while going short on large and mid-cap stocks; the latter are more highly correlated to the index than smaller companies, and therefore provide high beta protection when markets fall.
This fund has now closed to new money.
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