The future of one of Schroders’ flagship funds will rely on a larger number of smaller, active bets than under its predecessor, according to Philip Matthews.
Mr Matthews joined the group in October last year to take on the Schroder UK Alpha Plus fund left behind by Richard Buxton, who earlier in 2013 left to join rival Old Mutual Global Investors.
The manager said he had turned over roughly 60 per cent of the portfolio, which has led to the fund having more than 50 stocks, as opposed to about 30 under Mr Buxton.
Mr Matthews said while he was taking more active bets in the fund, the size of those bets was smaller than was usually the case prior to his arrival.
Mr Buxton had often said with the UK Alpha Plus fund he was either first or fourth quartile – a result of his large, active bets that paid off handsomely if they went right but hit returns on the downside.
“The active weight within the portfolio has come down to levels I feel much more comfortable with,” Mr Matthews said.
“What I am saying is, in the long term, I do not think there is a trade-off between performance and having a more diversified portfolio.
“Historically, my portfolios were more diversified and were less volatile, which ended up producing very strong total returns.”
During his tenure on the Jupiter Growth & Income fund from June 2001 to April 2013, Mr Matthews produced a top-quartile return of 105.7 per cent compared with the average return of 69.9 per cent from peers in the IMA UK All Companies sector, according to data from FE Analytics.
The process the manager is using is the same valuation-led one he employed at Jupiter, but he said the stocks he was buying now were different because “markets have moved on”.
“When I left Jupiter at the beginning of 2013 I had more domestic cyclicals than I have now and that is a function of the movement we have seen in markets [since then],” he said.
He has also introduced tobacco stocks to the portfolio and that sector now makes up 6.5 per cent of the fund.
“This is a call on the relative defensiveness and relative valuation compared with what is happening for other things in the market, and at the beginning of the year [tobacco stocks] looked relatively attractive,” Mr Matthews said.
He has also taken some exposure away from the “very high weighting” to financial stocks, with life insurance companies “definitely coming down”.
“I have been making significant changes, primarily by taking out the domestic cyclicals, such as in travel and leisure and domestic banks,” he said.
“There was a strong skew towards domestic cyclicals, which have been a great place to be for the past two years.
“At the margin, I have been putting a bit more into [companies that have] reliability of earning streams, such as BT, pharmaceuticals such as AstraZeneca, and medical equipment manufacturer Smith & Nephew.”
Mr Matthews has also added to “high-yielding businesses” such as BP and Royal Dutch Shell, the largest holding at the end of September at 7.3 per cent.
Asked if the fund was now focusing on income, Mr Matthews said it did not have an explicit target but it would have an “income tilt” as this area was where “you are most likely to find value in the market”.
How the changes on UK Alpha Plus impact Schroder UK Growth trust
There is now a high commonality between the UK Alpha Plus fund and the Schroder UK Growth trust, which Philip Matthews was recently handed responsibility for.
The manager said the two portfolios had “95 per cent commonality”, adding he had enacted the changes he wanted to implement in his first week on the trust. He said there were just six holdings where there was a difference in weighting between the fund and trust, but otherwise the two portfolios were virtually the same.
“The portfolio is mirroring the Alpha Plus fund as I want it to. It was a quick transition and I wanted to get it in the same place as quickly and cost-effectively as possible,” he said.
Schroders fought hard to keep the trust after Richard Buxton’s departure in 2013, cutting annual fees from 0.65 per cent to 0.6 per cent and promising Julie Dean, whose employer, Cazenove, was in the process of being acquired by Schroders, would run the portfolio.
But following Ms Dean’s departure in September this year to join her former Cazenove colleagues at Sanditon Asset Management, Schroders was again forced to contest rivals to keep hold of the trust.
It was successful again, although it had to cut fees further, this time from 0.6 per cent to 0.5 per cent.
