Old Mutual UK Mid Cap - getting the best out of the investment 'sweet spot'

Dominic Rowles | Wed 17 January 2018

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• Richard Watts is more positive on the prospects for the UK economy than many other investors
• He has positioned the fund to benefit by investing in economically-sensitive areas
• The fund retains its place on the Wealth 150 list of our favourite funds

Our View

Medium-sized companies, or mid-caps, are considered by some to be the investment 'sweet spot'. They are small and nimble enough to offer exciting growth potential, yet mature enough to limit some of the volatility associated with investing in smaller companies.

Richard Watts, manager of the Old Mutual UK Mid Cap Fund, specialises in this area of the market. He combines his economic views with his views on individual companies, and invests in those he believes have the brightest prospects. Our analysis suggests he has successfully added value through astute stock picking throughout his career.

The number of investments held in the portfolio will typically range between 40 and 50, which allows each investment to have a significant effect on the fund’s returns, but it is a higher-risk approach. The manager also has the ability to invest in some smaller companies, which are higher-risk than their medium-sized and larger counterparts.

Richard Watts benefits from the support of what we believe to be one of the best small and medium-sized company research teams in the country. We have been impressed with the fund’s performance and expect it to continue to perform well in future, although there are no guarantees. The fund retains its place on the Wealth 150 list of our favourite funds in the major sectors.

Manager's outlook

The manager is mindful of the risks posed by Brexit and other political uncertainty, but he believes they have been largely overstated in the media. He is less pessimistic than most on the prospects for the UK economy, and believes it will continue to grow moderately, with inflation remaining low. If his views prove correct, consumers and businesses could continue spending, which could increase the profits, and potentially the share prices, of many UK companies.

How is the fund positioned?

Richard Watts believes many companies that are sensitive to the health of the economy have been wrongly shunned by other investors, and this has made them attractively valued. He has therefore increased the fund’s exposure to some of these companies, including housebuilders such as Taylor Wimpey and Barratt Developments, and challenger banks including One Savings Bank.

Many medium-sized companies make money overseas as well as in the UK. More than half of the earnings made by the fund’s investments come from abroad. These companies could therefore continue to perform well if the manager’s positive views on the UK economy fail to materialise.

How has the fund performed?

The fund has performed strongly in recent years, which we attribute to the manager’s ability to identify companies with outstanding growth prospects. Star performers include mixer drinks producer Fevertree, online clothing retailer Boohoo and Blue Prizm, a company that produces process automation software.

The fund’s long-term performance is also impressive. An investment of £10,000 made when Richard Watts became sole manager of the fund in December 2008 would today be worth £57,828, while the FTSE 250 would have returned £45,628*. Investors should remember that past performance is no guide to the future.

Past performance is not a guide to the future. Source: Lipper IM* to 31/12/2017

Find out more about this fund including how to invest

Please read the Key Features/ Key Investor Information Document in addition to the information above.