Managed by Audrey Ryan and Peter Shaw, the UK stockpicking fund was launched in 2007 just before the financial crisis hit, but in spite of some tricky moments over the years, the fund has produced a steady return of 109.02 per cent for the five years to January 15 2014.
Ms Ryan notes, as an unconstrained portfolio, there are no stock or sector-specific limits although it is relatively concentrated typically holding between 35-55 stocks.
“I’m fairly agnostic as to where a good idea comes from for this fund whether it’s small cap or whatever. It is where we see the good opportunities. I don’t get hung up on what sector or what index a new idea comes from. There are times when we may be overweight the small and mid caps space, and that is the position we’re in at the moment as that is where we’re finding our strongest investment ideas from a bottom-up perspective.
“But there is great flexibility in terms of shape within the portfolio. When things were challenging back in 2008 we had quite a few large-cap names in the portfolio.”
She highlights the team approach to gathering the best ideas, but emphasises the final decisions are down to the two co-managers. “We are responsible for performance”.
“I believe we know our companies very well, we do in excess of 800 company meetings in any one year so we are very proactive.”
The manager notes that when looking at potential ideas, the focus is on “what is changing within the business that can drive the share price return”. Whether this is the fundamentals of the company or some form of technical aspect that could help surprise on the earnings side.
The fund is primarily a bottom-up stockpicking fund, but Ms Ryan notes there is a macro influence on the shape of the portfolio in the form of themes or views, potentially highlighted by the house view on the global economy and asset allocation.
She explains: “We have been long the domestic consumer in this portfolio for some time, more than 18 months, and part of the reason was that the market was very harshly punishing some companies from an earnings perspective. We were early into being long many consumer areas. I still have quite an exposure to the domestic related space via general retail, housebuilders and some plant hire companies. That was driven in part by the theme that we liked the domestic economy.”
Over the longer term, the fund has lagged behind the IMA UK All Companies sector average of 119.02 per cent, but in 2013, the fund delivered a return of 30.01 per cent outperforming both the sector average of 26.21 per cent and the FTSE All-Share return of 20.81 per cent, according to FE Analytics. Ms Ryan notes: “In 2013, roughly 75 per cent of the outperformance of the UK Opportunities fund was driven by stock selection.”
The fund benefited from overweight positions in areas such as consumer services, industrials and financials, but equally important was the areas it didn’t own, such as resources and in particular oil and gas and mining.
In addition, Ms Ryan says: “We’ve had a very distinctive developed market exposure over emerging markets. We have also been overweight the mid-cap space and small cap and AIM.”
The manager admits that among the detractors to performance was the underweight to Vodafone, which performed well, and no exposure to BT. But she points out: “In a stockpicking fund we’re trying to stick with about 45 stocks so there isn’t the opportunity to capture everything. I’ve had other more consumer-related winners that have more than offset not holding certain stocks. Clearly we don’t get everything right, but when you get things wrong, you can learn from them.
“We will continue to look for opportunities to take profits in some of the domestic-related stocks, where the opportunity cost in other stocks on a relative earnings basis might be more attractive.”
The unconstrained high conviction approach and willingness to move into the lower end of the market cap range makes it an interesting proposition for those looking for something a bit different.
“Some poor stock picks and a pro-cyclical bias hurt this fund in 2011 and 2012, somewhat tarnishing what had been a good longer-term track record for the fund, but in the past year, the co-managers have managed to turn things around once again. It has a large concentration towards consumer services, financials and industrials with almost 80 per cent of companies sitting in these three sectors.”
EXPERT VIEW
Darius McDermott, managing director of Chelsea Financial Services:
VERDICT
“Some poor stock picks and a pro-cyclical bias hurt this fund in 2011 and 2012, somewhat tarnishing what had been a good longer-term track record for the fund, but in the past year, the co-managers have managed to turn things around once again. It has a large concentration towards consumer services, financials and industrials with almost 80 per cent of companies sitting in these three sectors.”
