Should you stick with these UK dog funds?

The UK market is on a tear and many portfolios have been riding the wave: the average portfolio in the Investment Association’s UK All Companies sector has returned more than 11 per cent over the past 12 months, with the equivalent investment trust managing almost 15 per cent. 

As we discussed last week, dedicated value funds have really made hay, with names such as Ninety One UK Special Situations (GB0033063636), Artemis UK Select (GB00B2PLJG05) and JPM UK Equity Value (GB00B235SZ61) enjoying big gains.

Not all funds are enjoying such a resurgence, however. Some names, particularly those with a focus on small-cap stocks, have suffered badly in recent times, and several funds that once commanded armies of fans are sitting at the bottom of the performance tables. As such, it’s worth considering what we might expect from them in future.

Looking at all the funds in the IA and AIC UK all Companies sectors, it’s striking that four names with large followings have faltered. Slater Growth (GB00B7T0G907) sits on a 120 per cent return over 10 years that eclipses many of its peers, but is down by 13 per cent over a three-year period. Marlborough Special Situations (GB00B659XQ05), SDL UK Buffettology (GB00BF0LDZ31) and Jupiter UK Mid Cap (GB00B1XG9482) have suffered a similar fate, tanking after a run of very good form. The funds have also shrunk dramatically: the Jupiter UK Mid Cap has roughly £450mn in assets, having once managed more than £3.5bn. Buffettology, which once managed more than £1.8bn, is now much smaller with around £500mn.

The great hope

These funds have generally weathered the same storm, with small-cap quality companies notably out of favour. But the portfolios do differ in some important ways.

One name that stands out is Slater Growth, which seeks out “attractively priced companies that exhibit superior, sustainable growth potential” and uses metrics such as price/earnings growth ratios and free cash flow as a way to find holdings.

It tends to have a reasonably high level of concentration and a preference for small-cap shares, although it does hunt across the market cap spectrum. Of its 49 holdings, the biggest position, Serco (SRP), represents 7.8 per cent of the portfolio, with Next 15 Group (NFG) on 5.2 per cent, Prudential (PRU) on 5.1 per cent, fund administration services provider JTC (JTC) on 5 per cent and Tesco (TSCO) on 4.3 per cent. The fund also holds the likes of Foresight Group (FSG), Future (FUTR), Fintel (FNTL), Team Internet Group (TIG) and Marlowe (MRL). The team categorises the fund’s sector exposures in a fairly granular way, including a 12.9 per cent allocation to asset management and custody banks, 9 per cent in research and consulting services, 8.3 per cent in advertising, 7.8 per cent in environmental and facilities services and 5.2 per cent in pharmaceuticals.

What exactly is the bull case for the fund? Prosaic as it sounds, we can argue that the team is sticking with a process that has generated huge returns for investors in the past, that nothing about the fund itself has changed, and that the external factors that have caused it to struggle should abate over time. 

As Bestinvest’s Jason Hollands puts it: “The manager has a good pedigree and continues to apply a consistent investment process, but it’s been at odds with overall sentiment against the UK and smaller companies in particular. Long-term performance has been strong, but it has struggled a bit in recent years, partly because it hasn’t held the areas that have done relatively better in a higher interest rate environment.”

Analysis from Morningstar seems to bear out this sunny assessment. Slater Growth has a “Gold” rating, the highest Morningstar awards, with the company noting that the fund has a strong investment process that favours higher-quality companies. Morningstar’s analysts also like the fact that the investment team has remained stable, with not a single manager change in around two decades.

Morningstar’s main criticism of the fund, and one that is something of a common theme with this set of funds, is the fact Slater Growth charges fairly high fees. Its ongoing charges figure comes to 0.79 per cent, although investors should always focus on how a fund performs, and whether it does its job in a portfolio, rather than obsessing too much about charges.

What of the others?

There’s good reason for optimism with some of the other names, albeit tempered by complications. Marlborough Special Situations is a multi-cap fund with a significant bias towards smaller companies, and Charles Stanley chief analyst Rob Morgan notes that, with its growth bias, the fund could make some big gains “when interest rates are cut in earnest”. Like the Slater fund, it comes in for some criticism from Morningstar because of its fees, with an ongoing charges figure of 0.8 per cent, although this is not an unusually high figure for an active UK equity fund.

The fund has lost well-regarded former manager Giles Hargreaves, although Morgan adds that “the remaining team is experienced and could add value over the longer term”. Its biggest sector weightings are to industrials, technology and consumer discretionary stocks, with holdings including Lok’NStore (LOK), GlobalData (DATA), Alpha Group (ALPH) and Trustpilot (TRST).

Turning to the size of company the fund favours, its own breakdown lists a 26.4 per cent allocation to microcaps, with 38.4 per cent in small caps, 23.7 per cent in mid caps and just 2 per cent of the portfolio in large-cap shares.

The Buffettology fund is, in some ways, a similar offering, with a spread of different sized companies but more of a leaning towards bigger names. In late 2023, 29.1 per cent of the fund was in FTSE 100 companies at the end of November, with 25.5 per cent in FTSE 250 names, 25.6 per cent in Aim stocks and 9.9 per cent in two US-listed shares. The fund is as much a victim of its investment style as its leaning towards some small and mid caps, with quality shares taking a battering.

Hollands makes the case that the fund has a “clear and well articulated investment philosophy” and that it should fare better as conditions improve, and readers can see Buffettology manager Keith Ashworth-Lord’s assessment of the situation here, including a defence of holding Rightmove (RMV). The fund’s smaller size could also allow it more flexibility to back smaller companies, although it does take a lot of stock-specific risk with especially large positions in Games Workshop (GAW), Berkshire Hathaway (US:BRK.B), Relx (RELX), Bioventix (BVXP) and Rollins (US:ROL).

Specialists are less upbeat about the prospects for Jupiter UK Mid Cap, however. The investment team, which came over to Jupiter as part of its acquisition of Merian, has broken up, with Chrysalis (CHRY) managers Richard Watts and Nick Williamson leaving to set up their own firm and Dan Nickols set to retire.

And while the fund could also benefit from the growth investment style coming back into favour, Morgan notes that he would “be tempted to move on and back a more stable and consistently performing fund management team”. Here he points to Mercantile (MRC), a small and mid-cap fund with a reasonably low fee. “The gearing makes it higher risk, but it comes with a 10 per cent discount to NAV at present,” he says.