SVM founder Colin McLean has been reducing his tactical stock allocations in favour of the long-term core plays and UK mid caps he believes will outperform as the global economy slows down.
Mr McLean’s £140m SVM UK Growth vehicle, co-managed by Margaret Lawson, runs three buckets of stocks. The ‘core’, ‘tactical’ and ‘alpha kicker’ groupings hold long-term growth stocks, macro-trend stocks and special situation stocks respectively.
Mr McLean said he had scaled back tactical positions in miners, oil firms and large banks in the past year, and had not been tempted by recent falls for such sectors. He added: “We have one or two of the challenger banks but none of the legacy banks. We have very little in mining, metals and oil apart from Weir Group.”
This reversal out of large-cap financials, miners and oil stocks saw the fund take a keen focus on the higher end of the mid-cap space. Mr McLean said: “This meant we have exposure to more UK domestic-focused companies, with exposure to better UK growth and real wage inflation which have driven some consumer stocks, business services and property companies.
“We have been biased towards companies that seem to have potential for self-help: [those] more insulated from global problems which may have acquisitions to make, rationalisations, disposals and cost-cutting. So [there is] an element of underlying organic growth but also some other improvements to make.”
He said he had issues with many FTSE 100 firms, given their susceptibility to global disinflation, low growth and dividend cuts. “Their incentives have not been to shrink and return cash to shareholders, but [more to] remain as they are and make acquisitions that don’t add value,” he suggested.
Mr McLean said much of the UK Growth Fund’s 19.8 per cent return in 2015 came from longer-term holdings. Ryanair, Paddy Power (which is merging with Betfair) and Irish business services group DCC all contributed.
“We did well with Ryanair as it moves from being an airline that everyone loves to hate to one that realises it has an opportunity with more business travel, a good fleet and good airport slots. It has low costs and is very efficient, which gives it an edge,” he added.
He said DCC was “incredibly under-researched”, with many rival investors still unaware of what the firm actually does.
One position that does not concentrate on the UK economy is a 2.7 per cent holding in China Meditech. Mr McLean said the pharmaceutical firm was benefiting from growing consumer demand, despite concerns about China generally.
He said: “It sells consumer products in China and that is picking up quite strongly. We see the value in pharma research, and it has an advantage in China as permissions are much easier to progress.”
The SVM UK Growth fund returned 41.6 per cent over three years compared to 17.4 per cent for the Investment Association UK All Companies sector average, according to FE Analytics.