This €308.4m (£229.3m) fund is run by Sam Cosh, who took over as manager on November 1 2010 and proceeded to make some changes to the investment process.
He explains: “We try to identify good-quality businesses, and by that we mean businesses that will generate a high return from capital on a sustainable basis.
“We want those businesses to be managed by strong managers, and for us that means management teams that have proven track records of good capital allocation and which are aligned with us. So we like management teams with shareholdings in the businesses.”
Mr Cosh is the first to admit that finding an investment process that delivers on these aims can be the most difficult part of his job as a manager. He points out: “A lot of the problems that people have [with] investing is getting caught up with the market psychology or the noise of the market, or behavioural investing problems. We have a very disciplined process that helps to insulate us from the daily noise that gets expressed and to focus on the fundamentals. That’s really just understanding how businesses operate, how they generate cash flows and how management teams make decisions. We believe in company fundamentals overriding anything else, so we’re prepared to back businesses for the long term.”
Prior to Mr Cosh taking over the running of the fund, the portfolio had been in the hands of a Scotland-based team that had been through “a pretty difficult period”.
He recalls: “The small-cap assets were brought down to London to sit within the European equities team and I was recruited to take over those products within the process and philosophy of the wider European team. When we took over the portfolio I knew there were some changes that would need to be made, [such as] some biotechnology stocks and binary outcome stocks that didn’t sit well with our investment process and philosophy.”
Unsurprisingly, Mr Cosh does not take into account macroeconomic factors on the basis that these are not helpful in making stock-specific investment decisions. But he acknowledges: “We think about a market cycle – which we think is distinct from an economic cycle – and that really ties in with the psychology of investors where they go from excessively pessimistic to excessively optimistic. We try to think about where we are in that market cycle, particularly at the extremes, to focus our stock-specific research.”
The fund is ranked at level six on a risk-reward scale, and the R accumulation share class – which is the clean share class – has ongoing charges of 1.08 per cent.
The fund has notched up several years of outperformance, clocking up a return of 125.36 per cent in the five years to February 5 2015 against the FO Equity Small Cap Europe sector average of 66.69 per cent. In the past 12 months, it has returned a respectable 6.91 per cent, ahead of the sector average of 2.21 per cent, according to FE Analytics.
Mr Cosh notes: “In 2011, the market was down 19 per cent in euro terms, and the fund was only down 3 per cent and we were fully invested at that point. It wasn’t cash allocation that caused us to preserve our capital, it was just very good stock picking that delivered those results.
“If we move to 2014, it was a really interesting year where the value, cyclical rally continued into the first half and then we were behind the benchmark which had performed pretty well in the first half of the year. [It was when] I think the market got nervous about growth in Europe that investors as a whole started moving back towards quality assets and during the second half of the year our quality style helped in that regard.”
The top contributor to performance over the past year was Irish airline Aer Lingus, which he inherited with the fund, while funeral home operator Dignity has added to the fund’s performance.
Mr Cosh adds: “I think we’re pleased to have delivered very good performance while this strategy has been in place, and on a risk-adjusted basis it’s even better. It’s stock fundamentals that have delivered that performance, which gives us the confidence that it’s the right thing to do – to focus on company fundamentals and try not to be distracted by anything else.”
EXPERT VIEW
Jake Moeller, head of UK and Ireland research, Lipper
Younger fund managers have to earn their stripes in the absence of long-term pedigree and the fact that F&C is adapting its product suite around Sam Cosh is a very encouraging sign. A value approach and a large F&C team ensure balance sheets are thoroughly examined and idea generation is robust. Mr Cosh is building up some good numbers in the Lipper Equity Europe Small&Mid Cap sector and he is most likely on the way to becoming a bigger name.
