Merian UK Dynamic Equity - opportunity in uncertainty

Dominic Rowles | Wed 02 October 2019

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• Run by an experienced manager who's backed by a strong team
• Long-term performance has been strong but returns were weaker over the past year
• The fund invests in companies not listed on the stock market but we expect the unquoted exposure to reduce over time

Our view

We've held the Merian UK Equity team in high regard for a long time. Luke Kerr blends together their best ideas to form the Merian UK Dynamic Equity Fund.

He's got flexibility to invest in companies of any size but tends to focus on small and medium-sized businesses. They've got more growth potential than their larger peers and often go overlooked by other investors, although they are higher-risk.

We think Kerr's ability to think differently to other investors means the fund has the potential to do well over the long term, although his ability to use derivatives adds risk.

The fund also has some exposure to unquoted companies, which aren't yet listed on a stock market. The manager only invests in those that have already achieved a degree of success and are generating revenues, but this exposure does add risk. More recently, Merian has reached the stage where it would rather hold fewer unquoted companies in its open-ended funds. We expect the amount of unquoted companies in this fund to reduce and in time be sold completely.

Read more about the fund's unquoted investments

The number of units the fund can issue is capped to prevent it growing too big and compromising the manager’s investment approach. This, combined with the fund’s relatively high charges and performance fee, means it doesn’t currently feature on the Wealth 50. Details of the fund's risks and charges can be found in the key investor information.

How has the fund performed?

The fund's long-term performance has been exceptional. An investment of £10,000 made at launch in July 2009 would be worth £44,799 to 31 August 2019. The broader UK stock market returned £26,274. We put the fund's strong performance down to Kerr's ability to invest in companies with bright futures ahead of them. This isn't guaranteed to continue though and past performance is no guide to the future.

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2019

Performance wasn’t good over the past year. Many of the fund's investments struggled in the market downturn towards the end of 2018. An investment in Burford Capital, a company that provides funding for legal cases in exchange for a share of the settlement, was particularly weak. Its share price fell sharply following the release of a negative piece of commentary by a US hedge fund.

It wasn’t all bad news though. An investment in online fashion retailer Boohoo performed well, boosted by an announcement that the company's sales growth is expected to exceed 33% this year, putting it well ahead of initial forecasts.

Manager's outlook

Global economies have slowed throughout 2019 and the slowdown is expected to continue into the end of the year. When economic growth slows, investors often look to companies with the potential to grow whatever happens in the economy. The high dividends such companies have tended to pay could also make them attractive if the Bank of England were to cut interest rates. Their share prices are relatively high though, and the manager thinks they could have less growth potential from current levels, so he's reduced exposure to them.

In contrast, he's added to investments in companies whose prospects are sensitive to the health of the UK economy. He thinks many have gone overlooked and now look good value. They have the potential to do well if the UK agrees a deal before withdrawing from the European Union.

Kerr isn't trying to predict the outcome of Brexit talks though and he hasn’t invested the fund to benefit from any one particular outcome. He believes the Brexit crisis will be resolved eventually but gauging the precise timing is difficult as deadlines may change. Once this uncertainty is removed, he thinks the UK stock market will prove attractive to investors.

Please note this is an offshore fund so investors are not normally entitled to compensation through the UK Financial Services compensation scheme.

More about this fund, including charges

Key Investor Information