Multi-assetApr 8 2016

Selectors’ sub-£100m fund picks

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Selectors’ sub-£100m fund picks

After a tough start to the year for many asset classes, the V-shaped recovery seen mid-February has only added to the puzzle for many investors. As markets move into the second quarter, Investment Adviser asked five fund selectors for their sub-£100m, hidden-gem portfolios that they believe are well-placed to outperform.

Jason Hollands, managing director at Tilney BestInvest:

First State Asia Focus (£45m)

A nipper in the context of First State’s extensive overall Asian franchise. The fund was launched last year following the splitting of First State’s Asia teams between Edinburgh-based Stewart Investors and this team, who are based in Asia. It pursues a more high-octane approach than First State’s core Asia funds and is managed by Martin Lau and Richard Jones.

I think the small size gives the fund some added flexibility in the current environment. The portfolio is quite concentrated at 51 holdings and the strategy is to take an unconstrained “best ideas” approach. The fund currently has a big overweight to industrials (20.4 per cent v an index position of 8.4 per cent) and healthcare (10.4 per cent v 3.6 per cent) and is very underweight financials and energy. Although this is a fairly recently launched fund, Lau has a long and superb track record managing the First State Greater China Growth.

Asian markets have taken quite a battering over the past year, but provide a value opportunity for long-term investors and while the region continues to face headwinds, arguably the risks are priced in.

Ben Yearsley, investment director at Wealth Club:

PFS Downing UK Micro-Cap Growth fund (£21m)

Managed by Judith MacKenzie, this is a concentrated fund with 25 to 30 holdings – 28 at the moment. The manager is trying to apply a more private-equity approach to quoted companies, so she only invests in micro-cap firms that are under £100m – and typically under £50m – in size.

Ms MacKenzie is not taking board seats, but she’s not a passive investor who sits back and lets things happen. [The strategy involves] taking reasonable stakes and helping shape those companies, so it’s a hands-on approach.

You’ll find the holdings in many different types of companies, covering a range of sectors. It’s a broadly spread portfolio, despite the fact that there’s only 28 holdings. You’ve got support services, food producers, software, real estate, food and drug retailers, technology and telecoms. It’s an under-researched part of the market with lots of very interesting long-standing companies.

Particularly with this end of the Alternative Investment Market (Aim), time counts for a lot – you know the brokers, you know the companies. The manager has 15 years’ experience investing in Aim. It’s a niche product not in an expensive area of the market, not massively affected by Brexit or currency worries. It’s really interesting.

Why now? It’s not expensive. This space isn’t overly fished. Despite the fact that there are more micro cap funds now, lots of them focus on £100m+ and don’t go down to this level.

Ahmet Feridun, senior associate – investment strategy and research at Stonehage Fleming Investment Management:

Pimco MLP & Energy Infrastructure fund (£45m)

One of the investment themes we believe has a lot of potential over the medium to longer term is the North American midstream energy sector.

These companies have lower earnings sensitivity to the commodity price than other energy companies, as well as being beneficiaries of increased shale oil and gas production as technological innovation continues to drive marginal costs of production down. Additionally, the indiscriminate de-rating of the sector has led to attractive valuations across the board.

Our preferred way of accessing the theme is the Pimco MLP & Energy Infrastructure fund, which provides exposure to a concentrated list of companies within the sector with high-quality balance sheets, access to robust production growth, and which trade at attractive valuations.

Through Pimco’s global reach and scale, the manager can scope ideas across the capital structure of these companies, predominantly focusing on equity but also opportunistically allocating to credit, ensuring access to only the most selective opportunities within the space.

Darius McDermott, managing director at Chelsea Financial Services:

Mirabaud Equities Europe ex-UK Small and Mid (£44m)

The portfolio is run by Ken Nicholson who was previously at Standard Life Investments.

Sometimes you see processes that you feel are very repeatable, but with this fund you are out and out buying the fund manager. Mr Nicholson prefers companies with growth, but because there are some periods of time when value companies outperform he doesn’t just do that. He is a pragmatic manager, not confined to one thing.

He screens for multiple things, but is typically looking for your quality, unloved companies that are out of fashion.

We look for fund managers who can outperform and he consistently does so in both up and down markets. That is what we look for as fund researchers, people who can do well in both scenarios. If you believe markets go up, investing in mid and small companies is a good long-term strategy to give substantial outperformance versus a broad index.

James Calder, research director at City Asset Management:

MS TCW Unconstrained Plus Bond fund (£69m)

We were looking for something slightly different in the fixed income space. This fund has got a return target of Libor plus 500 to 600 basis points net of fees, and yields about 3 per cent.

What makes it different? It’s very much a value-manager approach. They’re currently negative on the outlook for fixed interest. The portfolio is highly liquid in that it is very cash-oriented and short-dated. The view that they’re taking is that something bad is going to happen in the bond market and, when it does, they will be a provider of liquidity, so they will go in there and do a lot of bottom fishing and hopefully do well out of that.

The team also have a focus on preserving capital over the medium term. We like it because we don’t expect to lose money from it and we expect performance to come in fits and starts. We think it’s appropriate across all risk mandates that we run.

It’s a very big team based out in the west coast of the US and they’re over on a regular basis, so we get to meet a number of members of the team.

It’s not just credit. They’re going to be doing duration management, yield curve positioning, sector allocation and security selection, and they’re also very opportunistic with it. They’ve got things like student loans, mortgages, mortgage-type stuff – so they’re doing something different from your run-of-the-mill strategic bond fund managers. We expect performance to be reasonably pedestrian until the bond event happens and then, after that, I think that’s when the managers start to create alpha for the underlying unitholders.