Manager David Urch notes the fund’s investment philosophy is based on “harnessing positive change, predominantly at stock level”. He adds this means owning companies where positive earnings revisions are on the horizon.
He adds: “By owning a concentrated but diversified group of such companies we believe we can outperform meaningfully over a reasonable timeframe.”
Mr Urch has run the fund since launch before he and the fund joined EEA Fund Management in October 2013 and notes the investment process is effectively “what we regard as best practice… combined to highlight change and allow a relatively small team to source and stay on top of ideas across the market”.
The team aims to pinpoint change at company level, isolate the factors driving that change, and then look to benchmark those factors against the company’s historic performance and the market consensus.
“Where we believe we have identified a meaningful difference… we try to exploit this anomaly by taking a meaningful position in the portfolio. We typically have an 18-36 month investment horizon on our ideas,” explains the manager.
He describes the process as made up of four parts: idea generation, idea validation, portfolio construction and portfolio monitoring.
A further element of the process is the ability to short single-name stocks up to a maximum of 15 per cent of the portfolio. “Any short position has to be fully funded. Effectively short ideas are competing with alternate long ideas for capital and must therefore offer a better risk-reward profile. This extra, demanding hurdle to stock selection means there may be long periods where we operate without any short exposure.”
The fund’s risk-reward rating is a level six out of seven according to its key investor information document for the I Sterling accumulation share class, while ongoing charges sit at 1.53 per cent.
The fund has performed well since launch with a return of 70.7 per cent between May 29 2012 to March 18 2015, according to FE Analytics, outperforming the IA UK All Companies sector average of 52.97 per cent and the FTSE 350 index rise of 46.68 per cent.
Mr Urch notes: “Bringing together best practice from working in a number of firms, [co-manager] Tim Hall and I have created a highly disciplined and active approach to momentum investing in which an element of macro and technical momentum overlay is now incorporated. These two additional elements, supplementing fundamental bottom-up research, account for around 20 per cent of the process.”
In terms of performance he notes the team has been reluctant to “get drawn into owning defensive or bond proxy stocks” and therefore the portfolio has favoured large- and mid-cap stocks at the expense of mega-cap equities.
He adds: “Recent additions, which now feature in our 10 highest conviction holdings, include G4S, where new management is transforming the franchise… and Dixons Carphone, where the recent repositioning of the business aligns it further into becoming a critical player… in its sector.”
At the sector level, the manager says value has been added through an overweight position in industrials and consumer discretionary, while he has remained underweight energy, utilities and consumer staples.
But Mr Urch adds: “As we have moved through the early part of 2015, the fund’s underweight position in consumer staples and, at times, energy have held overall returns back, as investors have favoured the international ‘bond proxies’ or played the recovery of the oil price from its year-end lows.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
This is a tiny fund of little more than £20m in assets. It benchmarks the FTSE 350, underlining a multi-cap approach with a mid- to large-cap bias. Charges on the fund are on the high side. Additional expenses of around 28 basis points is fairly typical for a small boutique start-up but a 175 basis points annual management charge on the retail share class simply doesn’t make sense in today’s markets. All in all this is a stockpicker fund, one with a nicely developing track record but the fund’s size and previous track record encourage caution without thorough due diligence.
