Launched in March 2000, the £137m SVM UK Growth fund aims to deliver medium- to long-term capital growth by investing in a portfolio of selected UK-listed stocks, with the additional objective of outperforming the FTSE All-Share index.
Co-managed by Margaret Lawson and Colin McLean, the fund adopts a flexible approach, combining a top-down view with bottom-up stock selection.
The investment process takes the form of a three-pronged strategy combining allocations to defensive core, tactical and ‘alpha kicker’ stocks – significant self-help, turnaround or restructuring companies – enabling the team to change position in line with market conditions, for example moving from defensive to aggressive to suit the economic climate.
Ms Lawson, who has run the fund since 2005, explains the defensive core accounts for roughly 45-55 per cent of the portfolio and includes large, internationally-focused companies with first-class business models.
“Generally they operate in niche markets, making it difficult for competitors to replicate their success. We look for strong, sustainable top-line growth in these long-term holdings. The tactical holdings make up 35-45 per cent of the portfolio. These stocks allow us to respond to improving or deteriorating market conditions by altering the defensiveness of the portfolio,” says Ms Lawson.
Meanwhile, the ‘alpha kicker’ component makes up the remainder of the portfolio and primarily focuses on mid-cap stocks where the business is experiencing fundamental change. These holdings offer the potential for a significant uplift in the share price, giving a meaningful ‘kicker’ to the fund’s performance.
The portfolio mix evolves through stockmarket cycles – for example, in the early stages of a cyclical recovery there is typically more emphasis on tactical holdings.
She adds: “Over the past three years there has been greater focus on mid-cap stocks capable of generating alpha, as we have identified more businesses with potential for restructuring and self-help. At the same time, over the past two years exposure to some of the largest economically-sensitive global businesses has been reduced, given our concerns about global disinflation and challenges in emerging economies. The weighting in more domestically-focused UK consumer and online businesses, healthcare, and business services has increased, while the fund over the past year has had very low exposure to resources, energy and banks.”
Ms Lawson points out the outlook for commodities, emerging economies and disinflation has encouraged the team to place more emphasis on businesses with exposure to improving UK real wage growth, UK economic growth, and eurozone recovery.
For the five years to January 8 2016, the fund’s B clean-fee retail share class has delivered a return of 73.8 per cent, compared with the IA UK All Companies sector average of 35.4 per cent and the FTSE All-Share index gain of 25.5 per cent, according to FE Analytics. The B share class sits at a risk level of six out of seven, while the ongoing charges are 1.06 per cent.
Ms Lawson highlights the fund has benefited from the team’s high-conviction stock selection using an active and unconstrained approach. She adds: “[It] has ensured we have been able to consistently beat the fund’s benchmark since inception. We use in-depth company analysis and seek to challenge consensus. Our approach is also suitably flexible to today’s increasingly volatile market, combining a top-down view with bottom-up stock selection.”
Contributors to performance include some of the consumer cyclical investments in areas such as travel, mid-cap healthcare and the gaming sector, while disappointing performance has come from the fund’s investments in Weir Group, Petrofac and IMI.
Looking ahead, the manager says a lack of clarity on global growth and the US Fed’s next move “has brought a note of caution into the market”, while geopolitical tensions are adding to investor uncertainty.
EXPERT VIEW
Gill Hutchison, head of investment research, The Adviser Centre
The fund is co-managed by two highly experienced practitioners in the form of Margaret Lawson and Colin McLean. Their investment strategy embraces a core of higher quality, long-term growth stocks and these are combined in the fund with more opportunistic, tactical and special situations positions. Overall, the fund typically has a mid-cap bias and displays strong growth-style credentials compared with peers. It has performed well in recent years, with a volatility profile that is more akin to mid-cap funds, but with a lower drawdown. Given the fund’s distinctive characteristics, it is best used as the all-cap growth component within a UK equity fund blend.
