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.
Process
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.
Performance
The fund’s performance has been consistently strong, outperforming the FTSE All-Share in seven of the past 10 years. In 2012, the fund returned 18.4 per cent, according to Morningstar, compared with 12.3 per cent from the benchmark index.
In addition, the fund has outperformed the benchmark index in one, three and five-year time periods to June 24 2013, including a one-year return of 22.87 per cent compared with the FTSE All-Share figure of 15.49 per cent.
Mr Stuart notes that while 2012 was a good year for the fund, for the year-to-date it is only slightly ahead of the market following a volatile first half of the year. “We weren’t as strong in the first quarter when the markets were racing, I tend to lag a bit in real momentum markets when people get really excited about things because I’m typically looking at things not quite as exciting.
“Things can change quite quickly and we’ve benefited from the market coming back because we’ve not fallen as much.”
Looking ahead, the manager suggests there is more potential for earnings risk as the continued volatility in markets and slow down in China mean companies delay investment decisions.
But he adds: “I’ve always expected a slight pick up in M&A as in this environment it makes sense for corporates to buy. It has not happened yet, we’ve seen some in the US but not the UK. Clearly the change in takeover rules has made it tougher to buy, but it will happen at some point.”
