2014 was not a vintage year for the UK stock market. By the end of the year, the FTSE All Share Index had delivered an overall return of 1.6%, while the average fund in the IA UK All Companies sector underperformed the market by 0.9%.
The Artemis UK Special Situations Fund, managed by Derek Stuart and Andy Gray, was one such fund which struggled to perform. The main culprits for underperformance came in the form of two oil-related names, Premier Oil and Petrofac. Both companies have worked to improve costs, according to the managers, but they suffered in reaction to the collapsing oil price. A holding in Drax, a power station operator, was also painful following the government's proposal to change subsidies for biomass plants.
Derek Stuart and Andy Gray aim to reduce the impact of external factors on stocks held in the portfolio where possible. However, they believe the consequences of interference in financial markets by politicians are becoming increasingly apparent. As such, they feel their primary focus of seeking companies that are looking to improve through self-help measures is increasingly important.
A number of other companies did, however, contribute positively to performance last year, such as Betfair, the online gambling business.
Company in focus: Betfair
The appointment of a new chief executive in 2012 has since seen the company in good hands. The company has increased its dividend payments in recent years, reflecting the highly cash generative nature of the business. Following a stellar period of performance for the stock, its valuation is beginning to look more demanding. While the managers believe the company remains the best in its sector, they have started to take profits from this holding.
At present, the managers do not feel there is a huge amount of value to be uncovered in the UK stock market - valuations are starting to look full and earnings growth is moderating. That said, select opportunities remain for those prepared to look. Derek Stuart and Andy Gray plan to 'look below the surface' in order to uncover value, by looking for management changes, for example, which could turn a struggling company into a recovery situation. A successful recovery could subsequently be reflected in a company's share price.
Our view on this fund
Derek Stuart has a good long-term track record managing UK equities and he has managed this portfolio since its launch in March 2000 (Andy Gray has been co-manager since January 2014). The fund performed exceptionally well over its first four years, when it was much smaller and had greater exposure to smaller companies. While the fund has outperformed its benchmark and the sector average over the past ten years, performance has been more subdued. As always, past performance is not a guide to future returns.
|Annual percentage growth|
| Feb 10 -
| Feb 11 -
| Feb 12 -
| Feb 13 -
| Feb 14 -
|Artemis UK Special Situations||23.0%||-4.9%||19.5%||20.4%||-1.0%|
|IA UK All Companies||20.3%||-2.4%||16.3%||16.3%||4.8%|
|FTSE All Share||18.7%||0.1%||15.5%||8.0%||8.3%|
Past performance is not a guide to future returns. Source: Lipper IM* to 02/02/2015.
While we rate Derek Stuart as a quality fund manager, we believe the fund's size is likely to restrict his ability to exploit opportunities in higher risk small and medium-sized companies. Presently, this fund does not feature on the Wealth 150 list of our favourite funds across the major sectors.