Manager Ian Heslop says the aim of the fund is to achieve consistent returns in the short, mid and long term and ‘move away’ from cyclicality at portfolio level, with an emphasis on thematics as opposed to individual stocks and sectors.
There are currently 180 positions in the portfolio and the average holding period is three to six months. But Mr Heslop notes that it is not useful to talk about the fund in terms of individual stock positions and neither does he take large sector positions.
“The whole point about this is that no matter what stock selection technique you use in active fund management you are likely to have cyclical returns, so there will be periods of outperformance and periods of underperformance. That mainly comes from the interaction of market with your stock selection technique.
“What we try to do with this portfolio and all the portfolios we run is to reduce cyclicality by thinking about the reasons why that cyclicality occurs.”
While the team does not go as far as to measure macroeconomic variables, the manager acknowledges that macro factors do indirectly impact portfolio decisions.
Mr Heslop explains: “It’s a bottom-up stock selection process. It is impacted by environment but we’re not making very broad macro forecasts.
“[We] look at what investors are actually doing in the current environment and that will give us clues for the likely outperformers and underperformers at a stock level, and the tools that we’ll need to isolate those stocks over the next period.”
The expectation is that returns will be 85 per cent to 90 per cent stock selection, with roughly 10 per cent attributed to sector selection.
Mr Heslop cites the fund’s thematic approach as having delivered “consistent outperformance” relative to its peer group. This has put the fund in the top quartile of the IMA North America sector over one, three and five years, delivering a return of 127.94 per cent in the five-year period, compared with the sector’s 96.43 per cent, according to FE Analytics.
The manager says: “There are portfolios in the North American sector which are growth portfolios or value portfolios. What that will lead to in certain environments is underperformance. So what we’re trying to do is effectively blend these different components to stabilise [performance] and that has led to the consistent outperformance over the long term.”
In the past 12 months, some of the themes which have played out in strong returns for the fund are cheap versus expensive stocks and companies which have been mispriced due to inefficient information flow.
“It comes back to the point that what we’re seeing in the portfolio underlines what we’re trying to do at the portfolio level, which is to use the tools that are likely to work given the environment.”
Turning to the economic outlook for North America, Mr Heslop says forward earnings are neither expensive nor cheap but he believes the US market needs to see some revenue growth come through this year, citing high margins.
He adds: “You don’t have to make heroic assumptions in the US market to get to high single-digit earnings growth for 2014 and that’s generally my expectation for market return over 2014.”
However, he identifies some “humps on the road”, one of which is tapering, “quite obviously”. The manager acknowledges the US remains in emergency economic policy and suggests that long bond yields need to normalise.
“As long as that yield increase in the long bonds occurs over the long term then equity markets have every right to move up nicely. That’s the one worry I have, that if we see quite a significant move in the long bond yield over a very short period of time then you may see some instability in equity market returns,” he says.
EXPERT VIEW
Rob Morgan, pensions and investment analyst, Charles Stanley Direct
Verdict: “The team’s approach is to screen companies against criteria including valuation, balance-sheet quality, growth characteristics, efficient use of capital and analyst sentiment. It also has a ‘market dynamics’ factor, which tilts the portfolio towards value or growth depending on the market environment. The process has historically worked best in trending markets while struggling at market inflection points. As you would expect from a quant fund the number of stock positions is high, while sector weightings are broadly neutral. Stock positions are also kept to within 1 per cent deviation of the index. This gives the fund ‘core’ characteristics, so for investors considering this type of fund for US exposure its an option, though personally I would prefer a higher conviction, stock picking approach.”
