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.
Mr Stuart identifies a lack of momentum in the market and two particularly poorly performing oil stocks – Premier Oil and Drax – as holding back more recent performance. He says: “Most of the performance lost has been in [having] no momentum. There have not been many negative positions. What has impacted us this year is not as much momentum in the fund as I’d like.”
He lists betting company Betfair, medical equipment company Smith & Nephew and software firm Micro Focus among those that have done well for the fund.
On his outlook, he says: “I’m not super bearish as I think the monetary situation means that equities still look okay. We’ve had five years of strong performance and we’ve got valuations that are ‘toppy’. I think it’s difficult to see the market going up a lot in that environment.”
On a more positive note, he thinks his investment approach is more relevant now than ever. “The process of identifying stocks that can self help and hopefully deliver some kind of performance irrespective of macro is even more important today than it was in 2000, as the number of outcomes there are in this macro environment is quite extreme,” he adds.
EXPERT VIEW
Jake Moeller, head of Lipper UK and Ireland research, Lipper
Derek Stuart has a long and distinguished pedigree on this fund, while Andy Gray is a recent newcomer. They exhibit very different personalities but Mr Gray certainly seems confident enough to provide any necessary challenge to Mr Stuart. Exposure to oil hasn’t helped their recent performance but this shouldn’t be considered as a bad call, perhaps rather bad luck on the unforeseeable nature of the price of oil. I’ve liked this fund and still think it is a good proposition. It is probably worth keeping an eye on how they position the portfolio now that there are fuller valuations and fewer opportunities to leverage off smaller and mid caps.
