Last summer I remember reading an article criticising the Met Office for issuing depressing weather forecasts that turned out to be untrue. Holiday resorts reported a fall in takings as people decided, on the basis of the forecasts, they wouldn’t travel. It instantly reminded me of the stock market. The media often tell us what a poor place the stock market is to invest, but the reality is quite different.
For instance, it is frequently pointed out that the FTSE 100 has failed to capture its 1999 high of nearly 7,000 points. Whilst this is perfectly true it doesn’t tell the full story. The index only measures capital return. Add in the effect of dividends, especially if they are reinvested, and the outcome is very different. In fact, even those investing at the top of the market in 1999 would have made around 40 per cent in total returns allowing for reinvested dividends. Not a huge return for 13 years of investing, but far better than the fall some commentators would have you believe.
Also seldom reported are the fine returns enjoyed outside the largest companies. The UK’s FTSE Mid 250 Index (which tracks the performance of the 250 next largest quoted UK companies) has offered outstanding long term returns, albeit with lots of volatility. Since the millennium it has trebled in value – again allowing for the reinvestment of dividends. Despite the depressing economic and political environment it has recently set new highs.
It just goes to show the UK stock market has plenty to offer, and amongst the teams specialising in the mid cap arena, I believe Old Mutual are one of the finest. The Old Mutual UK Mid Cap Fund is run by Richard Watts who started co-managing the fund in 2006 alongside Ashton Bradbury. He subsequently took over as sole manager in 2009. I never envied him in this task. Ashton Bradbury has a reputation as one of the very best active managers in the industry, so he was a tough act to follow. Richard Watts did take a while to find his feet, but performance over the last year has been driven by good stock selection, which suggests that his talent is now showing through.
It is often said the Mid 250 index is more exposed to the UK economy than the FTSE 100. That’s because domestic sectors such as retail and house building are well represented. Indeed
Mr Watts’ portfolio has become more UK focused in the last twelve months due to an increase in house builders, which now account for around 10 per cent of the fund. Some of these have doubled in value already, but he still believes that there is plenty to go as profit margins in the sector continue to improve. The UK theme continues with exposure to the pub and restaurant sector, and an improving UK stock market should favour the fund’s holdings in asset managers Aberdeen, F&C, Man Group and St James Place.
Mr Watts is well supported by a strong UK team at Old Mutual, which together manage £2 billion worth of assets. Unlike many other UK fund managers they have no institutional mandates and focus on retail money in just a few funds. Despite the macro-economic headwinds of 2012 the team remain optimistic on the UK market believing many of the economic problems will ease over the course of the year. They expect global GDP to be around 3 per cent and suggest it is not unreasonable to see high single digit profit growth from mid caps along with a 3 per cent dividend yield. So despite the mid cap index being near record highs they think there is more to go.
A notable feature of our research is that we continue to find many of the best active fund managers in the mid and small cap space. These are areas where in-depth, proprietary research can really drive outperformance. While investors take on more volatility exploring these areas, they are usually rewarded for doing so over the longer term – by which I mean five years plus. Unfortunately, too many investors end up piling out at the wrong time, usually because fear and emotion has taken over. As always, patience generally pays off.
Mark Dampier is head of research at Hargreaves Lansdown