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Buy Legal & General UK Alpha fund?

Investment | Specialist Helpful? 9

Asked by Highwall, submitted 27 June 2011.

Open Quote Could you let me have your view on the L&G UK ALPHA fund. It has performed 74% over 3 yrs and is no 1 in the UK All Companies sector over 1, 3 and 5 years. Should I transfer my ISA which is in Skandia which is expensive and a poorly performer?End Quote

Answered by Justin on 29 June 2011

The Legal & General UK Alpha fund has, as you say, performed very well over 1,3 and 5 years. More importantly, it's also performed well on a year by year basis, suggesting the manager hasn't just had one amazing (but lucky) year. So, on the surface, good news.

The main thing to bear in mind with this fund is that it usually has a high bias towards very small companies (often holding companies listed on AIM), which means both volatility and risk could be high.

The fund is run by Richard Penny, who splits investment between companies that he believes offer high growth potential (i.e. the businesses are growing fast) and more established businesses that he believes are undervalued (i.e. he hopes to buy solid businesses on the cheap). The split between the two depends on the manager's outlook, but the potential advantage of this approach is that it should help the fund take advantage of the good times and weather the storm during difficult markets.

To date Penny seems to have made more good than bad decisions, resulting in excellent performance. And he's done so for long enough to suggest he's genuinely skilful rather than just lucky.

I can't see a reason not to invest in the fund, but ensure you're comfortable with it being rather more risky than most other funds in the UK All Companies Sector. If things go wrong the losses could be painful.

Another thing to bear in mind longer term is fund size, as funds investing in very small companies only tend to work if the fund is small itself. For example, a £100 million fund can easily invest £1 million in each of 100 small companies, but if it grows to £1 billion the manager would need to invest either £10 million per company (which might be too risky as fund ends up owning a bit chunk of each company) or invest in many more companies (difficult as there may not be sufficient opportunities).

The Legal & General UK Alpha fund is currently around £200 million in size, which is fine. But if its strong performance does attract lots of new investors this could swell, in which case I'd hope Legal & general closes the doors to new investors, rather than risk compromising performance by allowing the fund to become too big.

If you decide to switch then check whether Skandia offers the Legal & General fund (availability depends on the exact Skandia product you have), as this would make things quicker and probably cheaper.

And, finally, if you don't need to use a financial adviser consider changing the 'agency' on your investment to a discount broker so you can receive trail commission rebates (if you don't already). See our Guide to Trail Commission Rebates for more details.


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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