I recently highlighted the possibility that it could be time for value funds to outperform and flagged up some of the closed-ended options operating in this area. There are also a number of interesting open-ended funds that might be worth considering.
One of the fund ratings agency FundCalibre’s favourites is the L&G UK Alpha Trust, which is managed by Richard Penny, who describes himself as a “tight-fisted Yorkshireman” when it comes to his investments. The fund operates in the UK All Companies sector and aims to provide long-term growth by investing in bargains from all corners of the market.
Penny looks for deep value opportunities, but balances them out with more growth orientated investments. This makes it almost a barbell strategy – with holdings at both ends of the spectrum – rather than a pure value play, but it could still be well-placed to deliver some strong returns.
The manager mainly looks for out-of-favour shares that are underappreciated by the market, and has about 250 company meetings a year. He invests in everything from the multi-billion pound blue chips down to small AIM-listed stocks.
At the end of March the £161m fund was split between 49 different holdings, with the top 10 accounting for 46.5% of the total allocation. These were mainly small caps such as Smart Metering Systems, First Derivatives, Micro Focus International and CMC Markets. It is an interesting combination, with the three most overweight sectors being Technology, Health Care and Industrials.
Penny, who also manages the L&G UK Special Situations Trust, used to run a technology fund in the 1990s and is still drawn to some of the smaller growth stocks operating in the sector. This didn’t stop him from getting caught out by the scandal hit Globo, an AIM-listed app developer where he had to write-off his final £2m stake, although he had already banked a decent profit from the position.
The six months to 18th December 2015 was one of the fund’s worst periods, when it underperformed its benchmark by 4.55%. This was largely due to poor stock selection in the Health Care and Technology sectors, but the manager remains upbeat and believes that the market will ultimately re-rate his holdings in line with their fundamentals. Despite the recent dip it is still a top quartile performer over one year.
The fund has tended to be more volatile than the UK market as a whole, with annualised volatility measured over five years of 13.92%, compared to the 11.25% experienced by its benchmark. Much of this was due to the high technology weighting and the significant exposure to small caps.
FundCalibre’s assessment is that it has been a rewarding option for adventurous long-term investors and they also point out that it is very different from most of the other UK funds. This could make it a decent diversifier if you already have a mainstream exposure to the home market, especially if the holdings in the deep value end of the portfolio come back into fashion.