We have long held Old Mutual's UK small and medium-sized companies team in high regard. Three of their funds - UK Smaller Companies, UK Mid Cap, and UK Dynamic Equity – have featured on the Wealth 150 list of our favourite funds for many years.
Each fund has held a longstanding bias to domestically-focused UK consumer companies, including house builders and retailers. This positioning was maintained in the lead up to the EU referendum as the team at Old Mutual expected the UK to vote to 'remain'. In this event, it was anticipated domestic earners would perform well.
As this outcome failed to materialise, the funds suffered in the initial aftermath of the result and the managers immediately reduced exposure to domestically-focused sectors across the funds. Further details of the changes made to the portfolios are outlined below.
|Old Mutual UK Smaller Companies||Old Mutual UK Mid Cap||Old Mutual UK Dynamic Equity|
Investments in house builders and retailers, including Crest Nicholson and JD Sports, were reduced following the vote. The fund maintains greater exposure to these sectors than the benchmark, however.
Cash increased from 5.5% prior to the referendum to 8.2% (as at 29 June), allowing the manager to invest in favoured areas at more attractive prices during periods of market weakness.
An investment in Dixons Carphone was sold, while Barratt Developments and Hungarian airline Wizz Air were reduced.
The manager has maintained an overall bias to consumer companies including Pets At Home and Card Factory.
The fund's cash balance increased from 5% to 9%. The manager will take the opportunity to invest this cash when attractively-valued opportunities present themselves.
Investments in Barratt Developments, Crest Nicholson, JD Sports, Workspace and Wizz Air were reduced following the vote. However, consumer companies continue to comprise a greater proportion of the fund than the benchmark.
Short positions, which benefit from falling share prices, were introduced in Clydesbank, British Land, Foxtons and Countrywide.
Each fund is a concentrated portfolio, which enables each holding to have a significant impact on returns, however this is a higher-risk strategy.
The prospect of reasonable economic growth in the UK has diminished since the referendum, in the team's view. Given the pound's fall in value and a potentially weaker environment for the UK consumer and business investment, they will consider whether any further changes to the portfolios are necessary, particularly given their bias to the UK consumer. The share prices of house builders and retailers have already fallen sharply and the team believe much of investors' negativity is now reflected in these prices, although they are mindful market volatility is likely to persist in the near term.
The managers remain optimistic about the longer-term prospects for the companies in which they invest. They remain focused on businesses they expect to grow irrespective of the health of the wider economy. Many offer the potential for high cash returns to shareholders (in the form of dividends), and should perform well in a low-growth and low-interest-rate world.
Our view on these funds
Against a volatile backdrop for small and medium-sized companies, and domestically-focused consumer businesses, the Old Mutual UK Smaller Companies, UK Mid Cap, and UK Dynamic Equity funds have struggled to outperform. This is over a very short timeframe however, and is not an indication of how the funds will perform in future.
Given their recent underperformance, small and medium-sized companies currently offer greater value than larger their larger counterparts, though they are higher risk. While markets could remain vulnerable in the short term, this could provide an attractive entry point for investors prepared to take a long term view and ride out periods of volatility.
Over the longer term the managers at Old Mutual have added considerable value for investors, which our analysis suggests is a result of good stock selection. We believe the team have the talent to deliver for investors over the long term and the funds maintain their place on the Wealth 150.
Please note the Old Mutual UK Dynamic Equity Fund has the flexibility to use derivatives which if used adds risk. A performance fee also applies, please refer to the latest annual reports and accounts for details of this charge. As an offshore fund investors are not normally entitled to compensation through the UK Financial Services Compensation Scheme.