Global equity duo Lucy Macdonald and Jeremy Thomas have hacked back the size of their portfolio to double down on conviction plays.
The pair, who run the £350m Brunner Investment Trust, said they have chiselled away at the number of stocks in their trust to 85 from 120.
Ms Macdonald said the market cycle was maturing since the financial crisis, which meant stock prices were now more likely to rise and fall independently as opposed to moving together, as can be common in the early stages of market recoveries.
“The correlations between stocks are coming down, so it makes sense to have more conviction,” Ms Macdonald said.
“We’ve also realised the top active stocks are driving performance, so it makes sense to have more in them.”
The manager said her top-10 holdings amounted to nearly 19 per cent of the portfolio, a situation that had prompted her to consider holding even fewer stocks, but she has instead chosen to stand firm for now.
This was mainly because other reductions would likely involve selling down larger businesses, said Mr Thomas, meaning the trust’s exposure to small- and medium-sized businesses would grow and potentially unbalance the portfolio.
This is the second large consolidation Ms Macdonald has been through since her appointment to the trust in 2005.
At that time, there were 160 stocks, however within a few years she gradually whittled the number down to 120 before Mr Thomas joined in 2010.
In the next few months, the pair said they will focus on rearranging the portfolio to source yield from outside the UK.
“We used to derive most of our yield from the UK, but as we go forward we will be looking for it in the rest of the world,” she said.
“There is more available in Europe and Asia, particularly [in] Japan.”
The trust’s most recent factsheet showed the duo had 42.9 per cent of the portfolio in the UK, 12.2 per cent in Europe ex UK and 3 per cent in Japan, as of the end of May.
While the pair believe there is the potential for a full recovery in Europe, they are steering clear of the periphery for now.
“Why would you buy something from the peripheral countries if you had the choice of the world?” Ms Madonald asked.
“There are some good stocks there, but they tend to be the exception rather than the rule.”
At the moment most of the trust’s European holdings are in Germany, although Ms Macdonald said she would be watching keenly the banks in countries such as France and Italy.
“Clearly they are a long way behind US banks but they are rebuilding now, so there could be potential opportunities,” she said.
The financial sector is the trust’s second largest allocation, making up 19.5 per cent of the portfolio, according to its factsheet. A significant chunk of this is in US banks.
“There is still some upside in the US across the financial sector, particularly in regional banks, like Wells Fargo,” she said.
“Still, as they get further into the recovery process we might start reducing our holdings.”
According to its factsheet, in the past five years the trust has outperformed its benchmark, with a share price total return of 78.8 per cent compared to the 71.5 per cent rise in a benchmark that comprises a 50/50 split between the FTSE All-Share and FTSE World ex-UK indices.
