Top 25 British Fund Managers
Best of British 2016
Our Best of British list once again shows that UK active fund managers can beat the market. This will be a welcome boost for UK investors post Brexit vote and with interest rates being so low, and it could help those feeling less confident about where to put their money.
The 2016 list features a new number one and more UK success stories. It also features industry veterans and skilled fund managers who have demonstrated the ability to consistently outperform through different market cycles, showing that there is good reason to be optimistic about investing in the UK right now and that over the long term, quality comes to the fore.
Beating the benchmark
This year’s top 25 fund managers have beaten their respective benchmark, achieving an overall average return of 7.9% pa compared to 5.4% pa for the FTSE All Share over 10 years. Refer to the table on Top 25 Fund Managers for all past performance
Income and small/mid cap focused fund managers have outperformed – taking seven of the top ten spots in the list and 13 overall. In fact small/mid cap fund managers stood out; there are five on the list (four in the top ten).
There is also a new number one with Mark Slater, fund manager of MFM Slater Growth, debuting at top spot having met all the qualifying criteria for the first time this year. Neil Woodford has climbed from ninth last year to fifth this time around. However, despite the move up the table, Woodford’s performance over the last 10 years has been surpassed by other managers such as Michael Lindsell and Nick Train, who run CF Lindsell Train UK Equity, and Anthony Cross & Julian Fosh, managers of Liontrust UK Smaller Companies.
- Core, skilled managers – We refer to experienced managers as core. Many of the core managers in the list are industry veterans who have stuck to their process throughout market ups and downs. They ride out the difficult times to deliver long-term outperformance, and while value and growth managers perform differently at different times, over the long term quality comes to the fore
- Income – Successful UK equity income managers tend to invest across the market cap range and have a focus on dividend growth over time
- Mid and small cap – These parts of the market are under researched and faster growing. Good active managers can exploit these inefficiencies over the long term, although they can go through periods of underperformance during shorter time periods
- Sustainable – Sustainable managers are increasingly competing with more mainstream UK equity funds in terms of performance. There are three sustainable funds on the list this year; what’s good for your health can also be good for your wealth
- TD Recommended Funds – Seven managers are also in our Recommended Funds list, including Mark Slater, manager of MFM Slater Growth, which is top of the list. The Recommended funds list is selected on a more qualitative basis and includes veteran managers, those who work for boutique firms and some up and coming managers who don’t yet qualify for the Best of British list as well as access to other regions and asset classes.
Best of British in numbers
- As a group, TD Best of British fund managers returned 7.9% per annum over 10 years
- Eight income managers
- In comparison, the 10-year return from the FTSE All Share was 5.4% per annum
- Seven funds from TD’s Recommended Funds list
- Six new entries into the list – including a new Number 1
- Five mid and small-cap managers
- Nine core and skilled managers
- Three managers of sustainable funds.
So what is the list made up of?
We noticed a number of experienced managers (core managers as we refer to them), adopting either a value or a growth approach, managed to outperform over the long term. This was interesting because it showed that both investment strategies were beating the benchmark.
In the chart we have used AXA Framlington UK Select as our example of a growth fund and Investec UK Special Situations as our value fund.
In the aftermath of the global financial crisis we can see both slightly beating the FTSE All Share but value investing growing at a stronger rate. This perhaps represented the many contrarian opportunities out there that value fund managers – or Alistair Mundy in this example – would have targeted.
As we see them both grow and pull away, noticeably from the FTSE All Share, growth takes over from value. The main learning from this is that, whilst both investment approaches differ, they are both beating the benchmark in the long term.
In an environment of modest growth and low interest rates income investors are increasingly seeking income from UK equities. UK equity yields currently exceed the yield on 10 year gilts, and have been shown to provide income which is consistent and grows over time. This looks particularly favourable versus other sources of income over the long term.
Many British companies have been increasing their dividends year-on-year, in fact the second quarter of 2016 was a record quarter for UK company dividends.
These dividends constitute a large portion of total returns, and for investors who don’t need to take the income reinvesting those dividends can boost the overall return from an income fund. It's worth remembering dividends aren't guaranteed, however you can see that Best of British fund Royal London UK Equity Income, for example, has significantly outperformed the FTSE All Share index over 10 years.
Sustainable investing is all about making the world a better place while still generating a good investment return – a case of what’s good for your health also being good for your wealth. Returns from sustainable funds Kames Ethical Equity and Royal London Sustainable Leaders, both of which are in the Best of British list, demonstrate investing sustainably does not have to hinder your returns, indeed those companies with sustainable business practices in many cases are performing better than those without such as focus. These funds are now competing on an equal footing with other UK equity funds and delivering performance ahead of the benchmark index.
Small Cap Effect
Over the long term small-cap companies tend to outperform their large-cap counterparts: they are typically at an earlier stage in their development and have greater potential for growth. This does usually come with more volatility, though, and in the short term there can be periods where small caps underperform. This happens particularly in times of market stress, such as those seen this year amid the uncertainty caused by the EU Referendum, when people often retreat to the relative safety of large, blue-chip companies.
The market for small and mid-cap companies is under-researched, underinvested and generally less efficient than the market for large caps. This creates some great opportunities for skilled active fund managers, who can exploit these inefficiencies in order to produce superior returns relative to the market. You can see a number of small-cap funds feature prominently in our Best of British list.
The cut off point for a manager to qualify for inclusion was 1 January 2006. The performance data has been run from 1 July to 30 June each year thereafter, concluding on 30 June 2016. The ten year past performance charts reflect this period.