This £678m fund is co-managed by Diane Sobin and Nicolas Janvier, offering investors exposure to the American smaller companies market. The managers invest in companies with a market value of between $500m (£410m) and $10bn at the time of purchase.
Mr Janvier observes: “This has historically been a faster growing area of the US market, and is often seen by investors as less efficient. We believe this offers investors attractive potential returns through faster earnings growth and the alpha that skilled managers can generate.”
The first step in the investment process is to identify where companies are in their operating cycle. “Our approach is to look for companies that are at or near the bottom of their normalised operating cycle and can show improvement in margins and returns. This means we are aiming to own companies through the steepest part of their growth curve, where most alpha is typically generated,” he explains. “Within this context we identify two types of opportunities: secular growth and cyclical recovery.”
With a larger opportunity set at their disposal, the duo believes the result is a better diversified, less volatile portfolio. It’s an approach Ms Sobin has been using since she became manager of the fund in April 2012, before being joined by Mr Janvier in December 2015.
He acknowledges: “While we build the portfolio based on stock-specific fundamentals, we make sure that we understand both the macro and the micro factors we expect to affect stocks. This is especially important for more cyclical opportunities that might be heavily influenced by the dynamics of the broader economy, consumer spending or the housing market, for example.”
Turnover in the portfolio is typically low as the holding period for stocks is two to three years. “The last significant change we made was in the first quarter of 2016 when we recalibrated our interest rate exposure,” he recalls. “We moved to a more neutral stance in both rate-sensitive names and high yielders, which we think gives us a good base for continuing outperformance through stock selection.”
The key investor document for the Z net accumulation clean share class shows the fund sits at the riskier end of the risk-reward scale at level six out of seven. Ongoing charges are 0.88 per cent.
Launched in November 1997, the fund has generated a return of 255 per cent in the 10 years to October 12 2016, compared to the IA North American Smaller Companies sector average of 198 per cent, according to FE Analytics. Over three years to the same date the fund outperformed its peer group, delivering 65.4 per cent to investors against the sector average return of 50.7 per cent.
In the past 12 months to October 12, the fund lags the sector slightly, returning 27.4 per cent, whereas the IA sector averaged a 32 per cent return.
“One of the most challenging areas of the market this year has been financials,” Mr Janvier points out. “Contrary to most investors’ expectations at the start of the year, the sharp decline in bond yields weighed on interest-rate-sensitive banks and insurers but benefited high yielders. We scaled back our position in regional banks, although we still see some good prospects for loan growth in specific geographies, such as the west coast, south east and New York markets. Within the higher yielding areas of the market, we selected real estate investment trusts – for which we can build a strong fundamental case.”
Meanwhile, top-performing stocks in the portfolio are across several sectors. He picks clothing retailer Burlington Stores in the consumer sector, which has a physical as well as online presence. “The company has delivered well against earnings, with good revenue and earnings growth. Off-price [discounted branded clothing] has been especially strong and one of the few areas of retail to see meaningful growth this year.”
He continues: “One of our favoured names within the materials space is Albemarle, a chemicals company with a strong lithium business. Demand for lithium has been increasing rapidly as it is a component in the batteries used in electric vehicles. This represents a source of secular growth that has seen the stock handily outperform the market in 2016.”
