This £1.3bn fund, launched in 1996, is run by Ben Whitmore, who took over as manager in November 2006.
Mr Whitmore is known for being a bottom-up stockpicker who runs money with a contrarian bias. He explains: “The aim of the fund is to obtain capital growth by exploiting special situations mainly within the UK.”
The manager holds out-of-favour and lowly priced shares in companies with sound balance sheets that are well run, or at least have the potential to be. He believes that any apparent weakness in their share prices is merely temporary, either for cyclical reasons or because they have fallen out of favour among investors.
To avoid “emotional pitfalls”, Mr Whitmore uses two screens to look for ideas for the portfolio. He says: “The first, a Graham and Dodd screen, helps identify shares that trade on less than 16x 10-year average earnings.
“The second, known as the Greenblatt screen, highlights those companies that offer the best combination of low valuations and high returns. In essence, the first screen looks for shares that are lowly valued in their earnings power across an economic cycle and the second looks for shares that are both lowly rated and have high returns.”
What he seeks is a sound franchise with a reasonable balance sheet, capital discipline and a conversion of profits into cash.
The portfolio currently has 49 holdings and is benchmarked against the FTSE All-Share index. According to its key investor information document, it sits at the higher end of the risk-reward profile at level five and has ongoing charges of 1.76 per cent.
Mr Whitmore maintains that “patience is necessary”, as the process of realising value with contrarian calls can often take years.
Talking about the portfolio’s current positioning, he notes: “Stocks and sectors with different characteristics in terms of risks taken for the sort of reward you might expect are increasingly trading at similar valuations. Traditional measures of value (Graham and Dodd) indicate limited value within the stockmarket, if history is to act as a guide.
“Consequently, the cash position in the fund is currently higher than average and the bias is towards the lowly valued areas in the market such as pharmaceuticals, software, oil and larger companies as a whole.”
Mr Whitmore’s fund has racked up several years of outperformance and is top quartile in the IMA UK All Companies sector over one, three, five and 10 years. In the 10 years to September 11 2014, it has returned an impressive 174.87 per cent to investors, compared with the sector average of 121.36 per cent.
In the three years to September 11, it has delivered an 83.94 per cent return, against 68.96 per cent from the sector.
He observes: “The fund has benefited from a tailwind as markets have rotated away from growth-oriented stocks and more towards value and large-cap stocks. However, there have been fewer opportunities, in my view, to find value in the market and therefore we have let cash build up. This should put us in a good position to benefit from greater volatility.”
In the year to date, the manager points out that technology and industrials have aided performance, as has merger and acquisition activity in the pharmaceuticals sector.
Mr Whitmore says that stock selection has contributed to the fund’s outperformance and highlights Hewlett-Packard in particular, “as chief executive Meg Whitman continues to turn around the once-ailing computer and printer manufacturer”.
As a contrarian, he seeks companies that are out of favour, albeit temporarily. He says: “One of these has been Ladbrokes, which has suffered in the wake of greater taxation and regulation, as well as the failure of its online strategy. We believe that the company has a strong brand and once it has addressed its online issues, we could see some upside in its share price.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
Ben Whitmore has a considered, deliberate approach that relies on almost dogmatic adherence to his absolute and relative value screens. Mr Whitmore’s turnover is well below median and he rejects the noise of the short-term market. His screens tend to drive quality and more mid- and large-cap ideas. Mr Whitmore applies an enduring approach and is not someone you would expect to take short-term bets. He is a clear proponent of classical value investing as set down by the likes of Graham and Dodd and Greenblatt. In some ways he is the anti-alpha choice, a reader of academia and a frank critique of traditional measures like capital asset pricing models.
