It remains the fund’s largest exposure, but the managers of the BlackRock UK Special Situations fund have started to reduce their position in the industrials sector.
Roland Arnold, who joined Richard Plackett as co-manager on the fund in August 2012, explains that the sector has seen a period of sustained growth and therefore the team have been taking profit from industrial holdings in the fund.
This money, he adds, has been allocated to the more consumer-facing areas of the market, with a notable increase to the fund’s weighting to banks – HSBC and Barclays are both present in the fund’s top-10 holdings, according to the latest factsheet.
Launched in 1981, the BlackRock UK Special Situations fund targets capital growth over the long term, predominantly through investments in small- and medium-sized companies.
Mr Arnold says: “The core strategy is to maintain a 50 per cent exposure to the small and mid market. The reason for this is because small and mid outperform in the long term.”
The fund is generally made up of between 60-80 stocks, currently holding 66.
The co-managers follow a five-step stock selection process which begins with meeting company management teams, as well as analysis into company balance sheets, positive earnings momentum, overall market share and historical trends.
“The types of companies we look for are those that would have been in a position to invest in the downturn. Haus, the kitchen supplier, is one example as are housebuilders that were buying land during the downturn,” Mr Arnold explains.
“The main crux of the process is company meetings,” he adds. “We attend roughly 700 meetings a year and it gives you a chance to interrogate management teams.”
At this stage, the managers are on the look out for entrepreneurs, Mr Arnold says, the management teams that are really looking for that company “to displace the market that already exists”.
Mr Arnold and Mr Plackett are supported by BlackRock’s small- and mid-cap team of six and, on the large-cap side, the managers draw upon the research from the wider UK team.
“[With small and mid cap] we don’t believe in allocating sectors to individuals. We all have an input, attend company management meetings and join in the debate as to whether a stock is a good investment,” Mr Arnold says.
The BlackRock UK Special Situations fund has a good track record, outperforming its IMA UK All Companies sector average in seven years out of the past 10 on a discrete annual basis, according to data from FE Analytics.
In 2011 and 2013, the fund marginally underperformed the wider sector, but only in 2011 was this performance negative with the fund recording a loss of 8.7 per cent compared with the sector’s loss of 7.04 per cent.
On a cumulative basis, the fund has consistently outperformed the sector average, returning 133.9 per cent in five years to January 6 compared with a 100.6 per cent peer group average.
Mr Arnold says: “The risks to the fund are stock specific, but by the very nature of the exposure [to small- and mid-sized companies] it would tend to be more risky.
“We use the large-cap element of the fund to lower the overall volatility on the fund so that investors can use it as a core holding in a portfolio. It allows us flexibility.”
The manager adds that in 2010, 2011 and 2012 the turnover on the portfolio declined because there were less opportunities for stockpickers. However, he claims that this year will present an interesting opportunity and expects turnover to increase.
Investors, it would appear, are convinced of the ability for this fund and its managers to serve them well, with the fund size increasing 30 per cent since January 2013 to £2.1bn as at January 6 2014. The managers aren’t concerned about capacity limitations, however.
“We have the ability to invest in up to 80 companies and currently only hold 66 in the fund, so we have the room to put more money to work,” Mr Arnold concludes.
Expert view
MARTIN BAMFORD, MANAGING DIRECTOR AND CHARTERED FINANCIAL PLANNER, INFORMED CHOICE:
Verdict
“This fund is probably the strongest of the three, with a management team who have been working together for nearly a decade. Described as a ‘pragmatic blended multi-cap’ strategy, the fund usually focuses on small- or medium-sized companies. BlackRock have a powerful research platform and the fund offers investors a well-diversified set of stock holdings. With the fund recently breaching £2bn, there are no immediate concerns over capacity constraints.”
