Derek Stuart has managed this UK Special Situations fund since it launched in March 2000 and was joined by co-manager Andy Gray in January 2014.
The portfolio, which has grown to £1.2bn in size, invests in UK large, mid and small caps across any sector. Mr Stuart defines special situations as turnaround or recovery stocks that are unloved by the market. He then tries to understand why they are in distressed situations and whether they can be rehabilitated.
He explains: “We are trying to identify companies where the internal change is the driver for the rerating opportunity. So it’s typically a company that has got itself into difficulty for various reasons – it’s in too much debt or done the wrong acquisition – [and] the incumbent management team leaves, a new management team comes in and addresses the issues.”
The idea behind this theory is that it’s a less risky way of making money than relying on macroeconomic factors. “We are trying to identify situations that are as independent of the macro environment as possible,” Mr Stuart notes. “I tend to have more faith in company management teams than I do in central bankers and politicians.”
The manager believes his philosophy is simple: “It’s all about spending time meeting management teams, understanding what [they] are going to do to improve the quality of the businesses and then we take a view on their ability to do that.” He acknowledges that he and his co-manager have to be optimistic the businesses they choose for their portfolio can be turned around, even when analysts and markets are telling them a company “is on its knees”.
“Bear in mind this fund was launched at a time when everyone was focusing on telephone company shares, software shares [and] any technology-type shares,” he recalls. “The valuations were extreme. But it did leave another chunk of the market, such as housebuilders and retailers, looking very cheap. That gave us an opportunity to buy, [and] it’s that kind of buying-against-the-herd instinct that a lot of people talk about but it’s actually quite difficult to do.”
But Mr Stuart admits that the risk they take in adopting this approach is that in the short term they buy into some of these situations too early and have to wait a few years for the shares to move. He cites pub retailing group Mitchells & Butlers, which the portfolio bought into three years ago. “It’s only in the past year that the shares have done anything,” he notes. “Sometimes the market takes longer to jump into those stories than we do.”
The fund has an ongoing charge of 0.81 per cent for its clean I retail share class, with a risk-reward level of five out of seven, according to its key investor information document.
The fund has outperformed both its peer group and benchmark in the long term, but short-term performance is slightly less impressive. In the 10 years to March 11 2015 it returned an impressive 109.68 per cent compared with the 102.19 per cent delivered by the Investment Association UK All Companies sector, data from FE Analytics shows. However, in the past 12 months the fund has posted a loss of 2.90 per cent against the sector’s positive 3.11 per cent return.