Researching UK funds – an example

I recently published a new permanent page on the site about the process of being contrarian in selecting funds and used an example of researching UK funds (which I think are cheap at the moment) to explain the process.

I have continued that research process and one curiosity popped up that I thought might be educational.

If you list UK funds in your preferred research tool, you will find the Blackrock UK Equity fund showing a year to date return of around 3% which is pretty good relative to the average large cap fund or even the benchmark index, say the FT All Share. This is a 5 star fund in Morningstar’s ratings.

It so happens that listed right next to it in the ranking order I selected was the Royal London UK Equity Class M fund which year to date has lost about 19%. Note that this is different to the Royal London UK Growth fund which did a little better and is classified as a mid-cap blend fund.

Now that is a whopping 22% gap from Blackrock. How come?

This is a blog post, so I will keep the answers short, but I am happy to discuss the research in more detail with subscribers.

• It is not that Royal London are just useless – the team they acquired when they merged with the Co-op has a good reputation and has delivered excellent results with other funds, notably sustainability focused ones.
• The fund manager at Royal London is relatively new (started 2016) – that might be a factor? The smaller companies fund which he runs is a poor performer.
• The performance of the 2 funds was similar until 2020, so something very different happened recently. In fact the Royal London fund has a Morningstar 4 star rating.
• A really big clue comes from the Morningstar 9 box equity style grid. The BlackRock fund is large cap growth and the Royal London one large cap value on Morningstar’s overall assessment.
• The top 10 holdings have considerable overlap, so the variation must be further down the holdings list, which we can’t immediately see.
• Although these are UK funds, the BlackRock fund has 25% of its stocks listed in the US, Royal London only 5%. An overseas listing is acceptable for a UK fund if the firm’s main business activity is in UK, or it is in truth UK based. Both funds own Experian plc, which is US listed, for example.
• Blackrock’s fund has a significant weight to technology and sensitive stocks, Royal London does not.

More research (like looking at half yearly reports) may reveal some more about the strategy of each manager, but on recent evidence, BlackRock made the right calls for a limited recovery in the UK stock market, biasing the fund away from some parts of the market. Royal London would look to be a good contrarian pick for the brave, although there may be better alternatives. I have not completed my work on this subject yet!

If you are going to invest against the trend (the momentum factor), you need to be thorough with your research and to supress your psychological biases. I will try to keep posting examples to help out!