Still room for stockpicking UK growth funds to add value

Standard & Poor’s Fund Services has published its annual review of the UK growth fund sector at funds.standardandpoors.com, consisting of reports on 62 UK growth mainstream and 15 UK smaller companies funds. All 77 funds have in common the quest for capital growth and must have at least 80% invested in UK equities. The smaller companies funds must have their 80% in the equities of companies forming the bottom 10% by market capitalisation.

Looking back at the 12-month period from June 2007 to June 2008, lead analyst Susan Sworn said that perhaps the most striking feature of the wider UK market was that outperformance was confined to just six of the 38 sub-sectors, including oil equipment services, oil & gas, mining, industrial metals, electricity and chemicals.

“This meant a negative impact on funds with too much exposure to UK domestic cyclicals and too great a sensitivity to a UK downturn (intended or not),” said Sworn, noting that at the same time, traditional defensive measures, such as yield, had failed to provide much downside protection.

Sector moves were determined largely by macroeconomic issues, which should have favoured funds employing a top-down approach. However, success depended on getting the macro scenario calls right, which proved tough for even experienced managers. On the other hand, bottom-up stockpickers found that even fundamentally sound stocks could be harshly punished if they were in areas considered vulnerable to a cyclical downturn.

“Even in a market dominated by macro concerns, skilled stockpicking was still able to add significant value,” said Sworn, pointing out that faced with the extreme volatility of performances between the mining and financial sectors, a number of managers chose to steer a middle course, ignoring market noise and concentrating on earnings quality, growth and sustainability to select stocks that brought solid returns.

As part of its annual review, S&P Fund Services assigned five fund ratings upgrades and 11 downgrades.

A notable upgrade was Standard Life Investment Funds – UK Equity Growth Fund, moved from S&P AA to the top rating of S&P AAA. S&P Fund Service’s analysts recognise that the fund ranks top decile over three and five years, generating 18% in excess of the median fund over three years. This successful performance reflects the group’s disciplined investment process and fund manager Karen Robertson’s astute stockpicking and portfolio construction skills.

Among the downgrades was Jupiter Undervalued Assets, where the rating went down from S&P AAA to AA. S&P Fund Services stressed that this was still an indication of the agency’s regard for the manager, the vast experience of the team and the fund’s long-term record. However, the analysts felt that the manager, Edward Bonham Carter, who is also CEO and CIO, has had less time to devote to hands-on fund management since Jupiter’s 2007 management buyout, and saw this as potentially a problem to performance.