Hold or Fold: Schroder UK Equity vs Aberdeen UK Growth

Investors researching UK equity funds are spoilt for choice while providers have to work hard to ensure their offering is noticed before that of a rival manager. This week our panellists reckon the two funds on show are strong contenders.

SCHRODER UK EQUITY

WHAT NEW MODEL ADVISER® SAYS:

The fund (Schroder UK Equity) is run by Schroder Investment Management and aims to achieve consistent, relatively low-risk, capital and income growth by investing in UK equities. The benchmark is the FTSE All Share index.

WHAT SCHRODER SAYS:

‘We look for two types of companies: those capable of generating sustained long-term profits growth because of their competitive positioning and strong business models, and those whose strong potential is, for some reason, not being recognised by investors,’ says the fund’s manager Simon Brazier. ‘We believe such attributes can generate significant returns over time and should be particularly attractive in the current market environment. The global economy now appears to be slowing and, while we believe it will remain reasonably supportive for equity markets, it could mean that the operating environment for UK companies will be less buoyant than in recent years. We believe the fund is well-positioned in this climate, as investors begin to turn their attention to companies that can deliver strong and sustained profits growth throughout the economic cycle. We define “good quality” companies as ones with a proven track record, strong management and a clear business strategy. As a result, a significant number of companies held in the portfolio are household names.’

WHAT THE ADVISERS SAY:

Lee Robertson, Chief executive officer, Investment Quorum

Both funds under review this week are competing in something of a crowded space. This one carries a Financial Express 2 Crown rating and has underperformed its sector benchmark over the longer- term periods of five and 10 years. Simon Brazier took over the portfolio which had suffered a bit from a highly-focused strategy, and which had lost out considerably in the recent strong momentum-driven market. Brazier replaced about 60% of the stock and is looking to outperform the benchmark by 2% a year on a three-year view. It has subsequently climbed back up the rankings under his stewardship and is now looking to be a much improved bet as a home for client money. While not my first choice in this sector, I would be comfortable to hold under this manager.

Ben Willis, Head of research, Whitechurch Securities

A core UK growth offering, this portfolio features a relatively new manager. Simon Brazier took over this fund just over a year ago and he has managed to turn around the portfolio’s performance. Since taking over, Brazier has managed to produce second-quartile performance without compromising the fund’s risk profile. This means that Brazier is achieving the fund’s objectives and existing investors in the fund must be pleased with the turnaround in its fortunes. Even though it is early days, Brazier’s management so far warrants existing investors staying put. For me, that makes the fund a hold.

Justine Fearns, Research manager, AWD Chase de Vere Wealth Management

The fund has not been the most consistent performer but, since taking over the management last year, Simon Brazier has managed to ease the fund up the rankings a little. Sector positions are sometimes quite chunky but the fund retains a strong risk return profile, which indicates that the sector and stock selection must be relatively strong.

Hopefully this upward climb will continue as Brazier’s tenure develops. Within the Schroder stable, this old-timer of a fund is clearly there to do a job and while I imagine portfolio stablemate UK Alpha would gain more attention this remains a hold.

ABERDEEN UK GROWTH

WHAT NEW MODEL ADVISER® SAYS:

The fund (Aberdeen UK Growth) is run by Aberdeen Asset Management and its investment objective is to provide capital growth through investing in companies registered in the UK and those which derive a significant proportion of their revenues or profits from the UK or have a significant proportion of their assets there. Its benchmark is the FTSE All Share index.

WHAT ABERDEEN SAYS:

‘[In May 2007] we initiated a position in Barratt Developments, the country’s largest house builder, based on the long-term structural undersupply of UK housing, a strong management team and compelling valuations,’ says Aberdeen. ‘We also added to National Grid and Bloomsbury, while raising our exposure to drug makers AstraZeneca and GlaxoSmithKline on weakness. Against this, we took partial profits in some holdings which had performed strongly, including Prudential, Friends Provident, Imperial Tobacco, and Scottish & Newcastle. We maintain our favourable outlook for UK equities, which are supported by robust corporate earnings and strong balance sheets.’

WHAT THE ADVISERS SAY:

Lee Robertson, Chief executive officer, Investment Quorum

This fund is a merger of the original Aberdeen UK Growth fund and the DWS UK Growth fund and the Aberdeen UK Blue Chip fund. As you would expect with the strong recent showings from the UK stock market, this fund has shown creditable performance over the last year although its discrete, one-year annual return to 31 May 2006 fell below the All Share sector average. Three year volatility is up over eight and the fund is solidly second quartile (while competing with funds from the likes of first-quartile Jupiter). I can find little wrong with this offering as solid second-quartile performance is admirable if not inspiring. If it was in an existing portfolio I would not rush to switch. However, for new money I would probably be looking for a stronger contender. I therefore make it a conditional hold.

Ben Willis, Head of research, Whitechurch Securities

Here is another core UK Growth fund that aims to steadily outperform the FTSE All Share year on year. Upon merging with DWS the management team was changed and Aberdeen’s pan-European equity team took over. Prior to this the fund had performed reasonably well in 2005, producing top-quartile performance that year and second-quartile performance the year before that. The new team has managed to return second-quartile performance beating the FTSE All Share while taking some risk off the table at the same time. Note that this fund is not an aggressive fund aiming to be top of the pile. It is targeting steady year-on-year outperformance and so far the new team have delivered. For now it’s a hold.

Justine Fearns, Research manager, AWD Chase de Vere Wealth Management

This fund is managed using a tried and tested process that’s been in place for a number of years. This is a big plus point, as it means that the fund should be more immune to any changes at manager level. Figures from launch are not so rosy, placing it firmly in the fourth quartile, but perhaps this is due to the strong risk return profile, meaning that less of the upside is captured in very strong markets. Having said that, the fund has done well over the last five years. As it was born out of three other funds that merged between December 2005 and April 2006, it can be forgiven for having a blip last year, while the portfolio was sorted out. Long may this continue. Hold.

NEW MODEL ADVISER’S® VERDICT

SCHRODER UK EQUITY

The panel were at one suggesting that the relatively new fund manager is doing a good job turning around the fortunes of this fund. Hold.

ABERDEEN UK GROWTH

The panellists were agreed that this fund does exactly what it says on the tin and thus warrants a unanimous thumbs up. Hold.

TWIST

Both funds rate a hold this week and Artemis Capital (Artemis Capital) is another portfolio favoured by IFAs.