Last week marked five years since we launched the UK Equity Plus strategy. In that time we’ve delivered top quartile performance (compared to the IA UK All Companies peer group), with lower than average volatility. All this despite one of the most volatile macro backdrops seen for some time.
“Volatile” is possibly one of the most over-used words in fund management, and a lot can happen in five years, but it’s probably fair to say that quite a lot did happen in the five years from 2015 to 2020.
Since UK Equity Plus launched in September 2015, we’ve seen a number of macroeconomic and political developments impacting global markets and the UK in particular. Many of which could never have been predicted.
For example, just four days after the launch of the strategy, Jeremy Corbyn was appointed Leader of the Labour Party, advocating policies such as renationalisation. He contested two General Elections, before stepping down.
It would also be impossible not to mention ‘Brexit’, which wasn’t even a word at the time we launched the fund. Having been added to the Oxford English Dictionary in 2016, it has now been voted on, been implemented and, while the negotiations on a new trade deal continue, the end is, at last, possibly in sight.
Globally, we’ve also seen ‘Trade Wars’ take centre stage following the election of President Donald Trump. This has impacted many of the companies we follow as they look to adjust their global supply chains. Finally, Covid-19 threw a spanner in the works for the domestic recovery that we’d seen emerge in early 2020 massively impacting markets and our daily way of life.
So it’s fair to say that the backdrop has been volatile, particularly for the UK. That’s probably why UK Equities trade at such a discount to other international markets.
Excitingly however, the outlook is rosier. With a relatively stable political back-drop, Brexit approaching its end-game and a nascent economic recovery underway. There will always be unknown unknowns to worry about, but that’s why we take risk management seriously.
But UK Equity Plus has outperformed throughout it all
Despite the VIX1 surpassing its 2008 high in 2020, UK Equity Plus has successfully delivered top quartile performance, with lower than average volatility [versus peer group] since inception. Performance is ahead of the benchmark (the FTSE All-Share index) over 1, 3 and 5 years. The fund has also outperformed the benchmark in 70% of quarters since inception, demonstrating remarkable consistency of returns.
That reflects not only a successful stock picking-process, but, particularly given the macroeconomic and political backdrop, an approach with risk management at its core (not unlike the approach required with any five year old!).
By accessing an alpha source that most other funds can’t
So what’s the secret formula? The answer – active extension, or in other words, the ability to short the stocks we don’t like, as well as buy the ones we do.
An ever changing macroeconomic backdrop will always throw up change. That’s why we aren’t tied to any one style, such as ‘deep value’ or ‘quality growth’. By simply looking to identify the winners and losers within each sector we can reduce macro volatility and maximise returns from stock selection.
Shorting 2, or benefitting from shares which underperform their sectors, has contributed around two-thirds of our outperformance since inception and has been particularly useful in years such as 2020 where structural change has accelerated.
Which is a particularly valuable tool in the UK
Identifying the winners and losers is only half the job – you then need a fund structure that can take advantage of both.
Active extension is particularly useful for investing in the UK FTSE All-Share market where, if you exclude the largest 20 stocks, the average index weight is less than 9 basis points. In other words, as a long only investor, it’s very difficult to generate relative performance from the vast majority of your underweights, no matter how much they individually perform.
In UK Equity Plus, by introducing shorting, we can extend the underweight in our least favoured stocks up to 1% and reinvest this capital into the stocks we like the most.
So here’s to the next five years
Such momentous change is bound to throw out winners and losers and some commentators have highlighted the recovery from Covid-19 as being ‘K’-shaped, i.e. with diverging fortunes for different types of companies, rather than a ‘V’-shaped recovery, or a rising tide that lifts all boats.
With a strong track-record in volatile market conditions and designed to benefit from divergence in company fortunes we are even more excited about the outlook for the next five years.
1 VIX – An index which measures volatility and based on the market’s expectation of 30-day forward-looking volatility.
2 The possible loss from taking a short position on a security (using financial derivative instruments) may be unlimited as there is no restriction on the price to which a security may rise. The short selling of investments may be subject to changes in regulations, which could adversely impact returns to investors. In UK Equity Plus, by introducing shorting, we can extend the underweight in our least favoured stocks up to 1% and reinvest this capital into the stocks we like the most.
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