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Merian UK Mid Cap - the search for home-grown growth

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Richard Watts looks for UK companies he thinks have long-term growth potential
  • His long term track record has been excellent but he’s had a tough 12 months
  • He thinks medium-sized companies could do especially well once Brexit is resolved

Our view:

Medium-sized companies, or ‘mid-caps’, combine the best of both larger and smaller firms – they’re small enough to be nimble and innovative and big enough to avoid some of the pitfalls of smaller companies. It all adds up to some exciting companies with lots of growth potential. They're still higher risk than larger companies though.

It’s what Richard Watts looks for in the Merian UK Mid Cap fund. He searches for companies he thinks have higher-than-average, long-term growth potential, or whose share price doesn’t reflect the company’s true worth. They can be everything from ones disrupting entire industries to traditional domestic UK businesses.

Watts doesn’t invest in many companies, so he needs to be really confident they’ll deliver over the long term before investing. A small number of companies means each one can make a meaningful difference to the fund’s performance, but it’s a higher-risk approach.

How the UK and global economies are performing is also important to Watts. He tweaks the fund according to his views on things like growth, inflation and interest rates. He’s one of few managers we think is skilled at this.

We think Watts is a talented fund manager. He’s backed by a strong team and has delivered excellent results for investors. The fund’s not on the Wealth 50 list of our favourite funds though. There are other mid-cap managers we rate just as highly but who run funds at a lower cost.

How’s the fund performed?

Watts’ performance since he took over the fund in 2008 has been excellent. He’s grown it 393.6% compared with 334.9%* for the FTSE 250 index. There’s no guarantee how the fund will do in the future though, as past performance doesn’t indicate future performance.

The past year's been tough for the fund though. While the FTSE 250 index made a small gain, the fund dropped 13.5% due to poor performance by several companies.

Pharmaceuticals business Indivior and clothing company Superdry were particularly disappointing, so the manager’s sold them both. Automation software developer BluePrism and tonic maker Fevertree also struggled after previous strong performance. The manager thinks they’ll do better so he stayed invested.

Merian UK Mid Cap performance under Richard Watts

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2018

Annual percentage growth
Feb 14 -
Feb 15
Feb 15 -
Feb 16
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Merian UK Mid Cap 7.1% 7.3% 24.5% 20.7% -13.5%
FTSE 250 6.1% -1.4% 16.2% 7.7% 0.2%

Past performance is not a guide to the future. Source: Lipper IM *to 28/02/2018

Watts has used the recent market volatility as a chance to invest in some attractively priced shares. They include online fashion retailer Boohoo, whose share price dropped by over a third during the last few months of 2018. He’s also invested in Aston Martin Lagonda as he thinks their shares are valued much lower than other luxury brands, so expects them to rise.

Watts also invests in some companies not listed on a stock exchange, known as ‘unquoted’ companies. It’s difficult for everyday investors to invest in them, but he's excited about the opportunities in this part of the market. He currently invests in Transferwise, for example, which he thinks will overtake Western Union as the global leader in payment transfers.

Manager’s outlook:

Watts thinks the UK economy’s still strong despite everything that’s been going on recently. He expects the UK’s growth to catch up with other developed countries. So he’s increased investment in domestic UK companies such as house builders Taylor Wimpey, Barratts and Persimmon.

He thinks a ‘no deal’ Brexit is unlikely. If there’s a good outcome to the UK’s departure from the EU, Watts thinks medium-sized companies could benefit significantly.

He also thinks many others are investing in the UK again so they don’t miss out on a potential jump in UK shares once Brexit is resolved. Watts is reassured by many medium-sized UK businesses that are optimistic about the future, and he is too.

Find out more about the fund including charges

Key investor information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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