News/Events

All change at the top of the fund performance tables [25th February 08]

The end of the tax year is closing in and it is that time when a lot of investors will decide to maximise their Equity ISA allowance. Everyone knows how difficult investment markets have been over the last year, but, interestingly there has been a change of guard at the top of the fund performance tables.

Riding high for many years have been the funds investing in mid-cap stocks but they have been knocked off their perch. Large-cap or blue chip funds which have lagged behind their racier mid-cap rivals, find themselves edging ahead.

There has been quite a dramatic swing over the past twelve months when looking at the relative performance of the FTSE 100 and FTSE 250 indicies. For the four year period to mid-January last year, the FTSE 250 produced a return of more than double that of the FTSE100 e.g. 189% to 89%. In the last twelve months however, it has lost 11% in comparison to a loss of only 4% for the blue chips.

I am sure the global credit crunch has played it’s part as investors started to move out of the mid and smaller-cap funds to seek the, so say, safety of the larger-cap stocks. There are two reasons as, firstly, they tend to be more International in their make-up and deemed to be a better bet than mid-caps which are more exposed to the slowing down UK domestic economy.   By having an exposure to International stocks then they are able to benefit from the strong growth of the Emerging Markets or Asia. Secondly, the big International buyers tend to look at the bargains in the blue chip Companies in the FTSE 100 rather than trying to unearth little nuggets amongst the mid and small cap stocks.

Of course, many of the mid-cap stocks were at a premium on the back of a possible bid as that is where the majority of private equity deals and merger and acquisitions were taking place.

There is a difference of opinion as to the future for the mid-caps where opportunities arise due to the constantly changing collection of Companies in the index but the downsides being that earnings forecasts are down and undoubtedly Companies in this sector are hoping for further cuts in interest rates – aren’t we all?

I am convinced that the mid-cap funds will recover as there is nothing fundamentally wrong but perhaps, as an investor, you should be picking funds that have the freedom to roam across sectors rather than being limited to their specific index. Some funds for example, have 60% or 70% in larger-caps and then the fund manager searches out good value stocks from other sectors.

A similar fate has been suffered by a number of Equity Income funds which have for so long been so reliable in constantly outperforming their growth contemporaries.

If you are still looking to invest before the 6 April, then I am sure that there are some buying opportunities in this sector should you require some income and indeed the mid-cap funds for pure growth.

Most importantly, it is essential you keep your portfolio well diversified so you don’t have all your eggs in one basket and keep your funds under review with a well qualified IFA.

This article was written by Langtons - Published in the Western Morning News, This is Money, 25th February 2008