In spite of a relatively short track record, the $1.7bn (£1bn) Polar Capital North American fund has benefited from what its manager calls an “old fashioned approach to investing”.
Andrew Holliman, who manages the fund alongside Richard Wilson, says: “The aim is simply to bring investors long-term capital appreciation in excess of the average North American stock.
In terms of the philosophy, we take a pretty old fashioned approach to investing – we do think people are giving us their clients’ savings to invest, and that’s really the foundation of the process. We spend our time analysing businesses and the valuations and fundamentals of the businesses and that is what drives the construction of the portfolio.”
It is a relatively focused fund of approximately 50 stocks, which Mr Holliman suggests is “sufficient to make sure we don’t have all our eggs in one basket, but also means we have a high conviction in our investments”.
He adds: “We take a long-term approach, a three- to five-year view, going into an investment. We think it is an important differentiator for the market, particularly in the US market, which can often be short-term driven.”
The team is focusing on both quality and value to gain exposure to the three, key return drivers in stocks: operational growth, capital return and potential re-rating.
“Whereas an all-out value investor or an all-out growth or all-out income investor might have exposure to just one of those drivers, we have exposure to all three. So we are very much a bottom-up, stockpicking, long-term orientated fund.”
Since the launch of the Dublin-domiciled fund in November 2011, the fund has delivered a return of 43.85 per cent, outperforming both the IMA North America sector average of 41.58 per cent and its benchmark MSCI North America index return of 41.33 per cent.
As long-term investors the portfolio is reasonably stable, although Mr Holliman notes the team has a “healthy appreciation of competition of capital”, and in the middle of 2013 it started to look more towards financials and to “nibble away” at a couple of energy holdings, including Halliburton, a diversified oil services company.
“The energy sector is quite interesting, but we haven’t really had much exposure there since the launch of the fund. We have struggled to find opportunities, particularly in energy producers, and we struggle to find the combination of production growth and free cashflow generation.”
He points out that while the advent of shale gas and oil is a very important theme for macro America, as it creates jobs, transforms the balance of payments and creates energy independence in the long term, it hasn’t always been possible to find the right plays.
“It’s all very well having a theme, but if the bottom-up fundamentals aren’t there, and the valuations aren’t there, we have struggled to find the right mix. It’s an example of where it is an important macro theme, but it doesn’t necessarily lead to the identification of interesting stocks. We had to think outside the box.”
Some of the other drivers of performance since launch have been the holdings in media companies such as Time Warner and CBS, and also success in certain healthcare stocks that have demonstrated good free cashflow prospects and the ability to grow those underlying prospects.
He adds: “Because we are not benchmark huggers, if we can’t find value we won’t invest in it. We have avoided expensive areas such as utilities and energy, which have been unattractive for a large part of the life of the fund.
“But the biggest detractor has been cash. We started the fund at the end of 2011, perhaps a bit too cautiously as there was significant uncertainty in where the general profit cycle was going. But even with just a little bit of cash, it has been a drag on performance in such strongly performing markets.”
Rob Morgan, pension and investment analyst, Charles Stanley Direct
Verdict
Manager Andrew Holliman is well known for his time at Threadneedle, where he managed the American fund, outperforming the sector handsomely. At Polar this has continued, albeit more modestly. Some of this can be explained by exposure to mid caps, but good stock-selection has also played a part. I like his high-conviction, stock-picking approach, a boutique environment allowing the manager to adopt his own philosophy, and a focus on quality stocks.
