Lloyds Banking Group has risen to be the largest position in Aruna Karunathilake’s Fidelity UK Select fund after he dumped his previous top holding in British American Tobacco.
The manager said Lloyds now made up a 5 per cent position in his fund and that he had reappraised the stock from being viewed as a recovery play to a steady growth company.
Mr Karunathilake said Lloyds was the first thing he bought after European Central Bank president Mario Draghi’s summer 2012 speech where he declared he would save the euro at all costs.
“I decided I had to have an action plan if the conditions in financial markets loosened and had to know what opportunities I would act on,” he said. “I bought a reasonable sized position in September/October 2012, have held on to it and it has done well.”
Mr Karunathilake said as it became a larger position, he had considered reducing his exposure to the stock because he had always seen it as part of the ‘restructure and recovery’ book within his portfolio.
“There were various points when I considered reducing it, but now it has moved from a recovery story to something that can be a steady growth, total return type stock with a decent dividend yield for the future,” he said. “When a stock like that has recovered you hope to take profits, but with Lloyds, when it got to that point, if I looked out a few years I realised it could be moving to my steady growth category, which doesn’t always happen. It morphed into that category.”
Besides Mr Karunathilake’s faith in Lloyds’ ability to become a longer term holding, its position at the top spot of his fund was helped by his full divestment of a 5-6 per cent position in British American Tobacco. “It was the largest position in the fund for about five or six years, since I started running the fund,” he said. “I sold the stock in the summer as even though I think the company is very good and well run the industry backdrop is deteriorating.”
He said rising competition from electronic cigarettes, available from various different companies, could prove to be a headwind to tobacco stocks.
Elsewhere, the manager said he had started looking for companies that were “less obvious” plays on the growing e-commerce industry.
Mr Karunathilake said he had recently bought into hospitality company Whitbread because its hotel chain Premier Inn had improved its online booking system and had begun to enact flexible pricing to encourage customers. He said he also now held estate agents Foxtons following its recent stock flotation because of its strong ability to “harness data to maximise leads”.
Performance on the fund has been steady, but largely behind the peer group average. It has produced third-quartile returns in five-, three- and one-year periods, according to FE Analytics.
The manager acknowledged having no exposure to Vodafone when it sold its stake in Verizon Wireless to Verizon Group “did not help” performance in the past year and that he “should have been quicker to reduce exposure” to oil services companies including Wood Group.