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Why this fund could be a better investment than the FTSE 100 in 2018

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There are many advantages to investing in the FTSE 100. For starters, the index holds some of the largest blue-chip companies in the world such as Royal Dutch Shell and HSBC. It also has significant international exposure as many companies have considerable overseas operations. Furthermore, the footsie is diversified across a range of industries, including financial services, healthcare and mining.

However, one downside is that because it only holds the largest 100 stocks listed in the UK, its focus is very much on large-cap equities. While larger companies can offer more stability and less volatility than smaller firms, in general, they do not grow as quickly as mid- and small-cap equities. This is demonstrated in the performance figures of the FTSE 100 vs the FTSE 250. For example, the former has returned around 50% for the five years to the end of November. The FTSE 250 index, which contains the 250 largest stocks outside the FTSE 100, returned around 90%. That’s a huge difference. Therefore, an allocation to companies outside the FTSE 100 could be a sensible idea for investors seeking strong growth over the long term.

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Mid-cap fund

One way to get exposure to such companies is through a fund such as the Schroders UK Mid Cap Fund (LSE: SCP). This fund can be bought and sold in the same way as a regular share through your broker. 

Launched in 2003, SCP’s objective is to invest in mid-cap equities with the aim of providing a total return in excess of the FTSE 250 index (ex investment trusts).

A glance at the portfolio’s performance track record reveals that it has achieved this objective. For the five-year period to end of October, the fund’s NAV returned 16.4% per year, comfortably beating the FTSE 250 ex investment trust return of 14.3%. Since inception, its track record is even better, returning 16.8% per year, vs 13.9% for the benchmark.

That’s a phenomenal long-term return. Financial experts often advise that shares as an asset class can be expected to return around 8%-10% over the long term. This fund has effectively doubled that over the last 14 years. Can you afford to be missing out on those types of impressive gains?

Holdings breakdown

So what stocks does the fund hold to generate that kind of return? Let’s take a look at the top 10 holdings:

Security Weighting
SSP Group 3.9%
HomeServe 3.3%
Renishaw 3.3%
Grainger 2.7%
Intermediate Capital Group 2.5%
Dechra Pharmaceuticals 2.4%
Redrow 2.4%
Rightmove 2.4%
Kennedy Wilson Europe Real Estate 2.4%
Bodycote 2.3%

Source: Schroders. Data as of 31/10

As you can see, SCP takes a unique approach to picking stocks. There’s little focus on popular household names and more of a spotlight on under-the-radar companies. It’s a strategy that works. FTSE 250 caterer SSP Group is up 70% this year. HomeServe has risen 25%. Dechra Pharmaceuticals has surged 50%. Fund managers Andy Brough and Jean Roche are clearly good at picking stocks.

The fund has a yield of 2.2% at present, with dividends being paid twice a year. Ongoing charges are a reasonable 0.95%. The discount to the NAV is currently around 17%. 

While we can’t predict what global markets will do in 2018, I believe having some exposure to mid-cap stocks is a sensible idea for growth investors. The Schroder UK Mid-Cap Fund looks to be an excellent investment vehicle for such exposure.

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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK owns shares of SSP Group. The Motley Fool UK has recommended Homeserve, HSBC Holdings, and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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