EQUITIES UK MID-CAP FUNDS
UK Mid-Cap funds
Mid-Cap funds vs indices – 3 years
115
105
95
85
%
75
Mid-Cap funds vs indices – 10 years
150
100
% 50
0
FTSE 250
FTSE All Share
FTSE 100
65
FTSE All Share
55
Feb ’07 Aug Feb ’08 Aug
Source: Financial Express Analytics
FTSE 250
FTSE 100
-50
Feb ’00 Feb ’02 Feb ’04 Feb ’06 Feb ’08
Source: Financial Express Analytics
Mid-Cap fund performance
Feb ’09
Aug
Feb ’10
Feb ’10
3 mths 6 mths 1 year 3 yrs 5 yrs 10 yrs
UK Mid-Cap Eq Fds -0.75 12.26 56.52 -11.88 0.65 2.85
FTSE 250 4.42 16.79 52.14 -3.16 8.16 7.06
FTSE 100 3.54 14.31 30.40 -1.97 5.19 1.45
FTSE AllShare 3.59 14.71 33.24 -2.45 5.42 2.14
MSCI World
Source: Morningstar
1.21 7.16 33.46 -9.30 -0.40 -1.77
Gauging potential
Mid-caps were strong performers during the equity
recovery in 2009 so, despite investor pessimism, they
may repeat that outperformance in 2010 and beyond
BY GARY SHEPHERD
After any crash there is
always debris, and many
would have us believe that
last year’s supposed ‘dash
for trash’ signalled the last
of the buying opportunities
for UK equities outside the
haven of the FTSE 100.
With 2009 having
proved to be a strong year
for mid-caps – after two
years of relatively poor
performance – are these
companies now looking
overvalued?
l Defending the sector
There is more to it of
course, and while market
commentators remain fixated
on the fortunes of the
mega-cap financials, miners
and pharma stocks, it is
worth noting that the FTSE
250 has outperformed the
FTSE 100 on roughly two
out of every three years
since its inception in 1985.
Larger companies do tend
to offer a higher yield,
but even taking that into
account the stats are particularly
striking over ten
years – on a total return
basis the FTSE 250 climbed
98% compared to a 15%
rise in the same period
for the FTSE 100. The All
Share fared little better,
rising by 24%.
Fund managers in the
mid-cap space are understandably
keen to defend
the prospects of their
sector, though the best
stockpickers are also real-
ists with specific industries
being given the wide berth,
especially those related to
the UK consumer and discretionary
spending.
l Manager scepticism
An extreme example is
Paul Spencer, manager
of Rensburg UK Mid-Cap
Growth Trust, which has
a significant underweight
in consumer facing businesses
except for a handful
of low ticket retailers, such
as Greggs, Halfords Group
and JD Wetherspoon.
On this basis, managers
say they are also sceptical
about the prospects for
potential new entrants into
the market via floatation
on to the FTSE 250.
“There is an awful
lot on the table, though
I do not see too many
of them being a success,”
says Derek Mitchell, manager
of Royal London Asset
Management’s (RLAM) UK
Mid-Cap Growth Fund.
“New Look is coming as
well as Supergroup, which
owns the Superdry brand.
They are both launching
into the consumer retail
space, which the market is
very sceptical about at the
moment given the likelihood
of higher taxes and
higher rates.”
However, Mitchell is
still expecting further IPOs
to come through over the
next year as private equity
firms look to sell off assets,
and this may or may not
open the door for opportu-
nities for shrewd investors.
As highlighted in
December’s Portfolio
Adviser, Spencer last year
took action in skewing
his fund towards overseas
earners (60% of the portfolio’s
profits) on the basis
of a bearish outlook for
the UK economy. This has
also been a favoured tactic
by other managers in the
sector – Mitchell says it is a
theme he has favoured in
the RLAM Mid-Cap Growth
Fund, which he took on
following the departure
of Leigh Himsworth to
Gartmore last summer, and
his UK Special Situations
Fund throughout 2009.
Mitchell adds: “What we
have seen over the past
five years is that the quality
of management within
mid-caps has changed
dramatically. They have
diversified away from the
old traditional UK manufacturing
base and have
looked towards places like
the Middle East and the
Far East and overseas earnings
have increased dramatically.
The percentage
of overseas earnings now
in mid cap is just short of
50%, which surprises a lot
of people.”
l Mega-cap footprints
However, Tom Becket,
chief investment officer
at PSigma Investment
Management, says he is
currently buying further up
the cap scale, despite recognising
“selective oppor-
60 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
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