- This fund offers exposure to the exciting growth potential of medium-sized companies
- It benefits from the talents of one of the industry's most-experienced UK equity teams
- The manager has increased flexibility to run his winners as they progress to the FTSE 100 index of larger companies
Medium-sized companies represent a dynamic range of businesses. Smaller and more nimble than their larger counterparts, they frequently capitalise on new areas of growth quickly. This enables them to increase their profits at a faster rate if things go well, although the risks are typically higher and they are more volatile than larger, more-established companies.
Medium-sized companies are the hunting ground for Richard Watts, manager of the Old Mutual UK Mid Cap Fund. He aims to identify companies experiencing earnings upgrades before other investors, profiting from share price growth once their potential is recognised by the wider market.
The manager has consistently adhered to this philosophy, although he has fine-tuned his investment process over the years. After taking charge of the fund in January 2009 (following his appointment as deputy manager in 2006), he turned the portfolio into a higher-conviction and concentrated portfolio of around 45-50 companies. We feel this approach offers greater opportunity for outperformance, although it is a higher-risk strategy.
Richard Watts is now also able to hold a greater proportion of the fund in larger businesses. The majority of the fund (at least 75%) will continue to be invested in medium-sized firms. However, the manager has recently been afforded greater flexibility to continue to hold investments as they progress from the FTSE 250 Index of medium-sized companies to the FTSE 100 Index of larger businesses. For example, he previously invested in a number of housebuilders, such as Taylor Wimpey and Barratt Developments, which have since been promoted to the FTSE 100. He believes these companies still offer growth potential in the near term and maintained these investments.
Performance and positioning
2015 was a strong year for the fund boosted by stock selection, according to our analysis. Key contributors to performance include payment processing company Paysafe, car dealer and advertiser AutoTrader, and online takeaway ordering service Just Eat. Avoiding the poor-performing oil and mining sectors also helped. That said, the improved performance of these sectors so far this year has recently acted as a drag on returns.
Presently the fund is biased towards businesses which can grow irrespective of the health of the wider economy. This includes the aforementioned Just Eat, Autotrader, and Paysafe, as well as food and beverage company SSP and private equity investor 3i. He is also focused on companies offering the potential for good cash returns to shareholders, such as Card Factory, Pets at Home and Unite Group, which provides student accommodation.
Richard Watts has delivered strong performance over the long term. The fund has grown 258.6%* under his management compared with 234.1% for the FTSE 250 Index, although please remember past performance is not a guide to future returns.
|Annual percentage growth|
| June 11 -
| June 12 -
| June 13 -
| June 14 -
| June 15 -
|Old Mutual UK Mid Cap||-9.3%||49.7%||13.1%||25.7%||-4.1%|
Past performance is not a guide to future returns. Source: Lipper IM to *01/06/2016.
Our view on this fund
This fund is one of our preferred options for exposure to the exciting growth potential of medium-sized companies. Richard Watts is an experienced analyst in this area of the market and he also has the support of Old Mutual’s talented small and medium-sized companies team, who we have held in high esteem for many years.
Over the long term our analysis suggests the manager’s performance has been driven by astute stock picking. We believe he has the capabilities to deliver for investors over the long term and therefore the fund features on the Wealth 150 list of our favourite funds across the major sectors.
Want our latest research sent direct to your inbox?
Our expert research team provide regular updates on a wide range of funds.