Fund Awards 2014: UK Growth

Larger fund winner: Ecclesiastical UK Equity Growth

Unlike some fund managers over the past three years, Ecclesiastical UK Equity Growth's Andrew Jackson has remained decidedly upbeat about economic recovery in both the UK and US, and has bravely positioned his portfolio accordingly.

"I maintained a belief that monetary policy in the UK and US would remain accommodative, so I focused on companies sensitive to improving economic conditions at home and abroad," he says.

These include Ashtead Group, an international industrial equipment rental company favoured by many UK fund managers for its exposure to the US housing recovery, and WANdisco, a "big data" tech stock whose share price benefited significantly last year from news that it was expanding into China.

Overall though, Jackson insists he is a stockpicker and really just looks for "good" companies. "The general investment strategy is to buy growing companies with good, defendable or improvable profits, solid balance sheets and positive cash flow at prices attractive enough to deliver acceptable investment returns," he explains.

Ecclesiastical UK Equity Growth, like a rising number of the funds in its sector, has a pronounced tilt towards small and mid-cap stocks that has contributed to strong performance since 2010. However, Jackson is keeping a close eye on valuations, as earnings growth continues to lag behind expectations.

"After 2013's strong run, which was ahead of reported earnings, investment value has been harder to find and shares have marked time as earnings struggle to live up to high expectations," he says.

However, Jackson remains characteristically chipper. "The UK economic recovery is broadening as well as deepening and I remain optimistic," he says. He adds: "No matter what the stock market conditions, there are always opportunities to find businesses where there is a state of change and things are improving."

The fund returned 80.8% in the three years to 1 March, compared with an average of 38.9% for the UK all companies sector. In the past year its ongoing charges figure was 1.6%.

Highly commended larger fund: Neptune UK Mid Cap

Medium-sized companies often outperform their larger counterparts and that has been the case with our highly commended fund, Neptune UK Mid Cap. It actually came out ahead of our overall winner in terms of its risk-adjusted performance.

Its more restricted remit means it has not qualified for our top award. Yet its consistent quality is clear from the fact that this is the second time it has earned highly commended status. Last year it was in the smaller-fund category and it has now graduated to larger-fund status.

Managed by Mark Martin since 2008, the fund invests in companies listed in the FTSE 250 index as well as the top 50 companies by size in the FTSE SmallCap, excluding investment trusts.

Martin has a distinct approach to buying stocks for the fund, that he has followed since its inception. He invests in three "silos": economic recovery stocks, structural growth stories and corporate turnaround companies. He always invests at least 20% of the portfolio in each of these types of stock.

There tends to be more of a domestic bias among medium-sized companies, but Martin says he also finds many interesting investment opportunities among companies that export to other countries. That said, he points out that he has reduced exposure to emerging market stocks over the past year or so. That may change, he says.

"We are now starting to see some quite interesting value opportunities in emerging market-focused companies."

He says one of the themes of the past three or four years has been companies cutting costs and expanding profit margins, but he thinks this phase has probably come to an end.

A lot of the mid-cap companies that he backs operate in niche areas of growth, where they are actually seeing top-line sales growth. He thinks some of these companies are quite attractive mergers and acquisitions targets.

He likes companies that are geared into the housebuilding cycle at the moment, although not housebuilding companies themselves, which he believes are somewhat overvalued. Instead, he thinks companies such as Carpetright, or Marshalls, the brick and paving supplier, stand to benefit from a pick-up in the housing supply.

The fund returned 94.2% in the three years to 1 March, compared with an average of 38.9% for the UK all companies sector. In the past year its charge was 2%.

Smaller fund winner: Unicorn Free Spirit

For a fund with only £30 million under management, Unicorn Free Spirit has held its own among the 250-odd funds in the UK all companies sector over the past three years, returning almost double the 36% sector average over that time.

This is due in no small part to Free Spirit's large overweight in technology stocks, which currently account for more than 60% of the fund. However, lead manager Fraser Mackersie is quick to reassure investors that this is not a risky play.

"The tech companies we are invested in match the Unicorn investment criteria; they are all forecast to be profitable, three quarters pay a dividend and two thirds have cash on the balance sheet. They have the fundamentals as well as being in interesting and exciting areas," he says.

Of course, not all of Mackersie's plays have been winning, with sports media provider Perform Group, whose share price shed 67% following two profit warnings in December, a stand-out clanger.

Addressing this, Mackersie is quick to concede that in technology "you're not always going to get everything right", but he stresses that there are currently plenty of long-term growth opportunities to be had in the sector.

Free Spirit's non-tech holdings include business energy and water consultancy Utilitywise, which was also the fund's strongest performer in the 12 months to 1 March. In the financial sector Mackersie is throwing his weight behind Secure Trust Bank, an AIM-listed UK bank currently exhibiting strong growth. Mackersie insists Free Spirit is not "wedded" to any sector - including technology.

The fund returned 67% in the three years to 1 March, compared to an average of 36% for the UK all companies sector. In the past year its ongoing charges figure was 1.79%.

Highly commended smaller fund: R&M UK Equity Uncontstrained

In the investment sector with the largest number of funds, achieving highly commended status is a significant achievement. For an "unconstrained" fund, by its nature potentially more volatile, to pass Money Observer's consistency requirements is also no mean feat.

Rather modestly, Dan Hanbury, the manager of River & Mercantile UK Equity Unconstrained, our small UK growth runner-up fund, attributes his success to both skill and luck. He says: "The cycle has been kind to us in recent years."

Aside from choosing the right companies, he also monitors economic indicators. R&M has quarterly meetings to ascertain the current position in the stock market lifecycle so that managers can adjust their portfolios accordingly. Hanbury says that in-house views on market cycles have helped him decide when to emphasise or de-emphasise certain types of stocks within his stock-selection process.

However, before he decides which shares to buy, they are filtered through the company's proprietary stock screening system, MoneyPenny, which scores and ranks stocks on its so-called PVT criteria. The PVT criteria refer to stocks with strong potential (P) for shareholder value creation, which are undervalued (V) and where the timing (T) is supportive. Fundamental research and analysis is undertaken by Hanbury and his team on ideas generated by MoneyPenny.

He says that a contrarian mindset has also helped him to invest in unloved areas. He explains: "I have been fortunate to work through the period with Hugh Sergeant, who is a past master at contrarian investing. We picked up early-cycle UK domestic cyclical plays - housebuilders and retailers - in late 2011 after the market falls, and we increased our financials exposure significantly in mid 2012 when there was real fear in those areas. More recently we have increased exposure to stocks with undervalued defensive growth characteristics."

The fund returned 62.8% in the three years to 1 March, compared to an average of 38.9% for the UK all companies sector. In the past year its ongoing charges figure was 2%.