According to the Investment Association (IA), over the year to the end of October some £1.45bn has been withdrawn from the IA UK All Companies sector, with only the month of March seeing positive inflows.
The UK Equity Income sector also saw outflows during the year, while the IA UK Smaller Companies sector, which produced one of the best sector average returns in 2017, only attracted £138m during the year, illustrating that investors have turned their backs on their own shores this year.
So what have they missed out on? Over the year to 18 December, data from FE Analytics shows that the average fund in the IA UK All Companies sector returned 11.91% over the time period, marginally ahead of the FTSE All-Share which was up 10.74%. For comparison purposes, the FTSE 100 was up just 9.67% as large caps generally struggled throughout the year.
The problem with shunning the UK all together, as Laith Khalaf, senior analyst Hargreaves Lansdown, points out, is not only are you missing out on diversification, but also exposure to some of the “best fund managers in the world”.
Size isn’t everything
Indeed, in 2017 just four funds out of the 247 funds in the UK All Companies sector witnessed negative performance. Taking the honour for the best performer was Peter Webb’s Elite Webb Capital Smaller Companies Income & Growth Fund, which year-to-date is up 39.41%. At just £2.6m this performance was missed out by many, despite it also being first quartile over three and five years.
Continuing the theme of biggest not necessarily being best, ranking second was the £125m MI Chelverton UK Equity Growth Fund, which managed by David Taylor and James Baker returned 30.64% during 2017. Taking third spot was the £44m Unicorn UK Growth Fund, which managed by Fraser Mackersie, was up 29.9%.
Turning to the UK Smaller Companies sector, Nick Williamson’s £358m OId Mutual UK Smaller Companies Focus Fund topped the rankings with an impressive 43.34% gain. In second spot was the £207m Jupiter UK Smaller Companies Fund, which rose 38.41%, with James Thorne’s £226m Threadneedle UK Smaller Companies Fund completing the top three with a gain of 33.22%.
“Despite the multiple headwinds that the UK economy faced in 2017, UK stock markets performed well in absolute terms and the mid and small-cap parts of the market performed relatively well compared to the broader UK market,” says Mark Martin, head of UK equities and manager of the Neptune UK Mid Cap Opportunities fund.
“The strong relative and absolute performance of the FTSE 250 Index reflected relatively low valuations for the index, and bearish sentiment at the start of the year,” he adds. “It is also important to remember that the constituents of the mid cap index in aggregate generate approximately half their revenues from outside the UK. Encouragingly, smaller companies within the UK market also benefitted from increased M&A volumes.”
Ben Yearsley, a director at Shore Financial Planning, says that after a stellar year for the index in 2016, this year was always going to be more subdued from an index perspective. As such, he argues it is no surprise that active funds have outperformed.
“I think the UK market is ripe for stockpickers and active funds both in 2017 and 2018,” he says. “The market is split in valuation terms between the haves and have nots, namely international and domestic earners. At some point the valuation difference will either narrow or switch. This big sector rotation will probably mean the market moves sideways, but the opportunity will be there for active funds.”