BEST LARGER UK GROWTH FUND
MFM Slater Growth
1-year return: 10%; 3-year return: 62%
Slater Investments has scored a double triumph this year, winning trophies in both the UK equity income and UK growth categories. Manager Mark Slater says selecting the right stocks is crucial, and describes how companies make it onto his shortlist for the Slater Growth fund.
'We screen for companies growing their earnings at an above-average rate, which can be bought cheaply in relation to their growth rate and can convert profits into cash.
'This eliminates 95 per cent of the stock market. We then focus on the degree to which growth is likely to be delivered, looking for identifiable tailwinds that make growth more certain.'
Slater does not favour any particular size of company. He believes a good growth business should perform well over the long term if it has been bought at a reasonable price.
'Occasionally other types of company become flavour of the month for investors, so a growth approach cannot outperform every day or month or quarter - but over time the approach is extremely effective,' he explains.
He highlights several strong contributors to the fund's performance over the last three years, including Hutchison China MediTech (a UK-quoted Chinese healthcare business), First Derivatives (an IT consultancy and software business), and Restore (a document storage company).
Slater admits that the future looks more challenging. He says: 'The key challenges for all investors are valuation and the lack of growth in the world. The solution is to ensure one is invested in companies that are likely to deliver at least in line with expectations.
'This means being more selective than usual, and will probably result in the portfolio becoming a bit more concentrated in those names in which we are most confident.'
BEST SMALLER UK GROWTH FUND
ConBrio Sanford Deland UK Buffettology
1-year return: 18%; 3-year return: 53%
ConBrio Sanford Deland UK Buffettology, which aims to mirror legendary investor Warren Buffett's investment approach, has been awarded the best smaller UK growth fund for the second successive year.
Keith Ashworth-Lord, who manages the portfolio, follows a methodology called 'business perspective investing'. In essence he is aiming to buy ownership interests in the best companies he can find, but only at a price that makes business sense.
When putting the portfolio together at launch in 2011, Ashworth-Lord screened the UK stock market for shares that Buffett would potentially buy. Among the qualities he looked for were well-established businesses with pricing power.
He also likes to see firms armed with plenty of cash on their balance sheets, and favours businesses that generate a high return on capital employed.
The portfolio contains just 27 shares, and the majority (16) have kept their spot in the portfolio since the fund launched.
Ashworth-Lord says his investment time horizon is five to 10 years; therefore he does not trade frequently. Like Buffett he prefers to buy and hold, ideally holding his winners indefinitely.
He avoids businesses he does not understand, such as tech companies and banks, due to their opaque financial statements. Top holdings include Domino's Pizza and wealth manager Mattioli Woods.
The fund has more than doubled in size over the past year, from £19 million to £42 million, but is still something of a 'hidden gem'.
Over three years to the end of March, the fund returned 53 per cent, placing it in the top decile of the IA's 257-strong UK all companies sector. Ashworth-Lord says volatile market conditions 'play to our strengths'.
HIGHLY COMMENDED LARGER UK GROWTH FUND
Old Mutual UK Dynamic Equity
1-year return: 10%; 3-year return: 56%
Our highly commended UK Growth fund has benefited from its ability not just to invest long term for growth in small and medium-sized companies, but also to 'short' stocks in those companies which Luke Kerr, the manager, believes will fall in price.
This flexibility to make positive returns even when share prices are falling has proved a significant advantage in the volatile market conditions seen over the past three years.
Kerr, the manager since 2009, is part of Old Mutual's UK mid and small cap team and is able to benefit from the best ideas it generates. If he believes markets are going up, Old Mutual UK Dynamic Equity will behave much like a traditional long-only fund and have little or nothing in shorts.
But if he feels the outlook is not so bright, he can have as little as 60 per cent invested, with the remainder in cash. He can then use up to 30 per cent of the fund to take short positions.
HIGHLY COMMENDED SMALLER UK GROWTH FUND
Axa Framlington UK Mid Cap
1-year return: 9%; 3-year return: 48%
Axa Framlington UK Mid Cap is highly commended for the second year in a row. Under the stewardship of Chris St John, the fund has been a regular outperformer since it launched in March 2011.
Over the three years to the end of March it returned 48 per cent, well ahead of UK all companies sector average of 18 per cent.
St John picks well-capitalised companies with growing profits, cash flows and dividends. The manager typically holds between 60 and 80 stocks, with a maximum portfolio weight of 4 per cent, in order to minimise risk.
He says he remains optimistic about the outlook for UK medium-sized companies, noting that they have the strength to continue delivering profit growth on a long-term basis.
'Change is inevitable, but not predictable. Businesses need to be both managerially and financially robust to deal with change - these are qualities we seek,' he explains.
BEST LARGER UK EQUITY INCOME FUND
1-year return: 5%; 3-year return: 35%
Our winning fund, Evenlode Income, has grown to £400 million and moved up a notch since it won the best smaller UK equity income fund award in 2014. However, the approach of its manager Hugh Yarrow and co-manager Ben Peters has not changed.
They focus on quality companies, which they believe are well-placed to generate good dividend growth over the long term.
They define quality companies as those able to grow sustainably without needing to reinvest much capital back into the business each year to generate that growth. Yarrow admits that this means the portfolio is structurally biased to certain sectors and away from others.
He says: 'Of the 81 stocks in Evenlode's investable universe, there is a bias towards sectors such as consumer branded goods, software, healthcare, business-to-business media, support services and speciality engineering.
'There are no banks, insurers, property companies, utility or telecoms companies, miners or oil producers.'
The managers look for two key features in the companies they invest in. The first is high and sustainable free cash flow. For example, they like repeat-purchase business models - such as companies which sell food or drink. The second is a strong balance sheet.
Yarrow says that among the successful investments that have helped drive performance over the past three years have been software companies such as Sage and Microsoft; consumer-branded goods companies such as Unilever and smaller companies such as Domino Printing (taken over last year), WS Atkins and Hays.
However, he stresses that avoiding more leveraged, capital-intensive and/or economically sensitive businesses that have cut or cancelled their dividends, has been just as important.
Yarrow believes UK dividends may fall over the next year or two, but he does not believe in pressurising companies to pay dividends.
He explains: 'We actively encourage investment in the future, such as in research capabilities and new product development, even if this sometimes holds back cash flow and dividend growth in the shorter term.'
BEST SMALLER UK EQUITY INCOME FUND
MFM Slater Income
1-year return: 4%; 3-year return: 45%
For the second year running MFM Slater Income wins our best smaller UK income growth award on the back of its continuing strong performance.
Over the past three years to the end of March the fund has returned 45 per cent, comfortably ahead of the average of 20 per cent from the IA UK equity income sector.
The fund boasts one of the highest yields in the sector at 4.5 per cent, achieved through the managers investing across the market spectrum. Income is paid quarterly. Total assets have nearly doubled over the past year, from £66 million to £113 million.
Stocks are chosen by a four-strong management team: Mark Slater, Barrie Newton, Bryan Quinton and Ralph Baber.
The portfolio is divided into three buckets. The managers believe this arrangement gives them a balanced portfolio and a solid spread of reasonably priced businesses.
The first segment is reserved for growth stocks that also have a good yield. Slater picked out pub company Greene King as an example. 'It offers investors an attractive prospective dividend yield of over 4 per cent, more than two times covered,' he says.
The second consists of cyclical companies that are not growing their earnings rapidly, but where there is potential for improvement in a strengthening economy. This part of the portfolio may include companies recovering from short-term difficulties, such as housebuilder Bellway.
The final bucket is reserved for 'dividend stalwarts'. These companies offer slower but hopefully more reliable earnings growth, which will result in sustainable dividends. Slater cites Imperial Brands and Royal Mail as two shares that fit the bill.
One of the fund's new holdings is a real estate investment trust called Redefine REIT. Slater says: 'It is targeting a rate of dividend growth above inflation, which should support the share price.'
HIGHLY COMMENDED LARGER UK EQUITY INCOME FUND
Invesco Perpetual UK Strategic Income
1-year return: 1%; 3-year return: 35%
Manager Mark Barnett, the former protégé of Neil Woodford, has certainly earned his stripes since he took over the Invesco Perpetual UK Strategic Income fund in 2006.
According to data analyst FE Trustnet, Barnett has outperformed the sector average seven times in the past 10 years.
The manager - who runs six other funds - focuses predominantly on firms paying sustainable dividends.
He currently favours tobacco companies, with Reynolds American, British American Tobacco and Imperial Brands the three biggest positions in the portfolio.
He is cautious on the overall economy and wary of further dividend casualties in 2016. For this reason he is maintaining large weightings in areas with a 'high level of resilience and consistency of cash flow and dividends'.
HIGHLY COMMENDED SMALLER UK EQUITY INCOME FUND
Montanaro UK Income
1-year return: 6%; 3-year return: 38%
A relative minnow with £127 million in assets, Montanaro UK Income once again proves that small can be beautiful, winning the highly commended award in this category for the second year.
Charles Montanaro, who launched the fund in 2006, has assembled a portfolio of 'high-quality' smaller companies. Holdings in the top 10 include Britain's largest sausage-maker Cranswick and self-storage firm Big Yellow Group.
It has been one of the best performers in the UK equity income sector, returning 38 per cent over three years to March.
Montanaro does not obsess over valuations. Instead he says it is worth paying a bit more for reliable dividend payers, describing his investment approach as conservative.
Through a genuine focus on the long term, turnover and transaction costs are kept to a minimum. The ongoing charges figure (OCF), 0.36 per cent, is low. Rival funds typically have an OCF of 0.85 per cent.
BEST LARGER UK SMALLER/MID CAP EQUITY FUND
Axa Framlington UK Smaller Companies
1-year return: 15%; 3-year return: 67%
For the third year running, Axa Framlington UK Smaller Companies takes home the award for this category.
This fund, managed by Henry Lowson since 2012, has beaten the vast majority of fund rivals over the past three years to the end of March, returning 67 per cent. That's 30 percentage points more than the UK smaller companies sector over the period.
A strong management team is essential, Lowson says, as well as pricing power. He meets around 500 management teams a year. Industrials and consumer services are the two biggest sector weightings, at 35 per cent and 19 per cent respectively.
Lowson says he is finding more value in businesses with a market value of less than £400 million. The fund's portfolio is well diversified, holding over 80 stocks.
Typically around a third of the fund is invested in companies in the FTSE Small Cap index and a third in Aim-listed stocks, with members of the FTSE 250 index making up the rest.
Lowson says smaller companies tend to be at an earlier stage in their life cycle, and are often more dynamic. He adds: 'There continues to be a lack of research at the lower end of the market capitalisation spectrum, which results in interesting and relatively unknown investment opportunities.'
Since the winner was announced, Lowson has left Axa; Dan Harlow, who co-managed this fund prior to Lowson's arrival, has taken over once more.
BEST SMALLER UK SMALLER/MID CAP EQUITY FUND
TB Amati UK Smaller Cos
1-year return: 20%; 3-year return: 55%
Investing in smaller companies can be very rewarding but also risky. However, for the managers of Amati Smaller Companies fund, which has won the best smaller fund accolade in this category, small companies are their bread and butter.
They specialise in UK small and mid-sized company investment. They also run two Aim venture capital trusts. The three managers are Paul Jourdan, Douglas Lawson and David Stevenson.
They say this team approach makes their decision-making agile enough to respond to opportunities, but considered enough to allow each recommendation put forward by a manager to be subject to stringent peer review.
Their aim is to provide 'a fund for all seasons'. In order to do so, the team seeks out companies they believe are worth backing for the long term.
When looking for potential investments, the managers try to avoid 'me-too' companies and those with no clear competitive advantage operating in markets dominated by larger rivals.
They like companies with a high level of valuable intellectual property and a proven ability to commercialise it, and favour those where they see the potential for trade acquirers in the medium term.
The managers' investment process over the past three years has steered them towards UK domestic economy-exposed stocks and longer-term structural growth within services, technology, healthcare and financials.
Amongst the top contributors to the portfolio have been Fevertree Drinks, a leading supplier of premium tonic water and other spirit mixers; veterinary group CVS; onshore oil and gas explorer Pantheon Resources, which had two significant discoveries in Texas in 2015, and fashion retailer Ted Baker (sold in 2016).
BEST ETHICAL EQUITY FUND
1-year return: 2%; 3-year return: 41%
Premier Ethical, managed by Chris Wright, has retained the award for best ethical/socially responsible investment equity fund. It has an ethical committee that stipulates the types of investments excluded. These include businesses that produce goods or services for weapons.
The manager estimates around 10 per cent of shares in the FTSE All-Share are off-limits; but as the three-year performance numbers show, this has not hampered performance.
Instead, Wright seeks to invest in companies that benefit the community they operate in, or the environment in general.
The fund invests mainly in large companies, favouring high-quality shares that can grow their earnings regardless of the economic backdrop. The three top holdings are insurer Legal & General, Lloyds Banking Group and housebuilder Berkeley.
Wright says the fund is currently structured as it is because stocks on the whole are 'really dear'. He adds: 'The underlying momentum of economies and earnings forecasts is now quite poor.'
But high-quality names should be able to grow, he says, 'so really the current strategy is to invest in quality, and that's the main aspect of the fund at the moment'.
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