Co-manager Mark Sherlock, who has been part of the team at the helm of this fund for the past five years, says: “It is an unusual situation because we have been basically locked up in the basement for the majority of the fund’s history and only in the past year have we been allowed out into the third-party area of the business.”
With the aim of delivering capital appreciation in the long term, the fund targets what Mr Sherlock refers to as “high quality” stocks, but is eager to point out that this doesn’t mean he is seeking out “high growth” companies.
“A lot of fund managers mean high growth when they say high quality – they are looking for the next Apple or Google at the small cap end of the market and following it all the way up, essentially the shooting stars that will make their portfolio,” he explains.
“That’s not what we are looking for. What we mean by quality is sustainable competitive advantage, the thing that allows a company to do what it does better than the competition and sustain it in the long term.”
Process
Mr Sherlock and co-manager Robert Anstey invest from the bottom up with a focus on company fundamentals such as cash flow, higher margins and stable income streams.
“We are looking, in many instances, for stealth companies that are below the radar,” Mr Sherlock explains. “We are firm believers that the tortoise beats the hare.”
As a result of its ability to invest in both small and mid cap stocks, the fund is benchmarked against the Russell 2500 index, which according to the manager “includes anything that isn’t in the S&P 500”.
“Valuations are fair, slightly above long-term trends at 16-17 times. This is a couple of points higher than the large-cap index, but that is typical of this [small and mid cap] market because it is higher growth and benefits from merger and acquisition activity. Compared with other asset classes, the [small and mid cap] market itself looks inexpensive.”
Mr Sherlock cites building materials company Eagle Materials as one stock that performed particularly well for the fund in 2012. “The past couple of years have been a tough environment for construction-related stocks because no-one was building houses. We set out to find undervalued stocks in this space,” he explains.
The firm produces wallboards, the product used for building internal walls in houses, and has benefited from having what Mr Sherlock describes as “low-cost production”.
Performance
The fund’s latest factsheet, which details the performance history of the fund dating back for the full 12 years, shows the vehicle returning an annualised 12.29 per cent, compared with an index return of 10.08 per cent, since inception.
Data from FE Analytics detailing the performance of the Ucits fund launched in September 2012 shows the fund lagging the benchmark slightly, returning 28.12 per cent compared with the Russell 2500 index return of 29.63 per cent.
The manager explains: “Our aim is to lose less in the down markets and outperform in the up markets. In the very strong rising markets we may struggle to keep up with the low-quality, high-growth type investors.”
Defending the fund’s long-term track record, he adds: “In the past 12 years there have been three negative market returns for the index – 2002, 2008 and 2011. In each of those three years we outperformed by a reasonable percentage, and that is at the heart of what we are trying to do. The best way to make money over the long term is to lose less in the down market and then we have a higher base from which to grow in the up markets.
“This is not a yo-yo fund, rising 10 per cent and falling 10 per cent, it is a stable fund with stable returns.”
