Everyone likes an underdog, and for the £1.07bn Artemis UK Special Situations fund, it is those companies with steely self determination to succeed that have boosted performance.
Derek Stuart, co-manager of the fund alongside Ruth Keattch, notes the ethos of the fund has remained unchanged since its launch in 2000.
“Clearly the aim of the fund is to maximise performance and outperform the benchmark [FTSE] All-Share index. Typically I’m looking for unloved recovery turnaround situations and, more often than not, a new management team is coming in to improve the returns of the company.
“I’m trying to focus on companies where there is a high degree of self help. As we can see the macro environment is tough, markets are tough so the more I can invest in companies where they can make internal changes to generate returns, that’s what I find attractive.
The fund’s investment process is bottom up, with Mr Stuart noting the ethos has been “to try and reduce the risk of being invested in companies that are at the whim of the macro environment, and to focus much more on companies where they have a high degree of self determination”.
Although he notes there are times when the managers need to take into account the macro situation. For example, if there is a recovery proposal in a UK high street retail company, there is the combination of macro pressures and structural pressures of the internet that the managers “have to fully recognise”.
“HMV three to four years ago looked like an interesting turnaround situation with new management but, of course, the business was destroyed by the fact no-one buys CDs anymore – they all download music. So I have to be conscious of those developments, but it is pretty much about the companies themselves. It’s about the franchise, it’s about what can be done to the business, about the pedigrees of the management coming in and what have they done before.”
An example of a business that is starting to look attractive to Mr Stuart is Halfords, which last year appointed a new chief executive, Matt Davies formerly of Pets at Home.
“That to me is an interesting situation,” explains Mr Stuart. “Halfords has been an under-managed business, it hasn’t been invested in and all these attributes make it interesting to me as a potential turnaround. We don’t currently own Halfords, but I think it is one to look at. To me that’s a typical business, it is not a new business. It’s a well-established, relatively mature business that has gone off the rails in some way, and a new management have come in to rejuvenate it.”
Stocks tend to stay in the portfolio for a number of years as the turnaround situation unfolds, although Mr Stuart points out it depends on the valuation and when a holding hits its price target.