Tom Wilson marks his third anniversary as lead manager of the F&C UK Mid Cap fund this week - a magic number in terms of track record and eligibility for client portfolios.
He was actually co-manager for a good six years prior to taking the reins, so the transition wasn't a huge deal, but he has made his mark both in terms of performance and making the fund his own.
While the process and philosophy remain exactly the same, how the portfolio is constructed has changed.
The portfolio used to hold 40 equally-weighted stocks (2.5 per cent each), but Mr Wilson felt that this didn't provide enough flexibility for him to truly back the stocks in which he had conviction, so now the fund comprises 25-35 companies at varying levels.
In terms of performance, it's always been a good fund – outperforming the sector average in nine out of the past 10 years, according to FE Analytics, total returns in sterling – the only blemish being on the back of the Brexit vote when mid-caps were hit hardest.
While risk elsewhere in the world seems to be underpriced, there are pockets of the UK where the risk priced into stocks is too high.Over his tenure, it is ranked 26 in a peer group of 247, and has outperformed the average fund by 13 per cent and the FTSE 250 ex IT index by almost 10 per cent, based on data from FE Analytics, total returns in sterling, 30 April 2015 to 24 April 2018.
The manager focuses first and foremost on limiting capital loss and he has a good, sensible process, based on understanding and investing in simple businesses at reasonable valuations. He uses screening tools as part of his process to identify businesses which are able to make good returns throughout the economic cycle and to screen out stocks with high levels of debt.
He will then analyse the businesses looking for strong competitive advantages.
He believes that such companies can continue to generate profits irrespective of the economic backdrop and this should help them stand the test of time.
However, the manager is also careful not to over-pay for companies with these characteristics.
John Laing Group is a good example of this. It is an infrastructure investor, not a constructor, so has its own cycle that isn't linked to global growth. It's dull – not the next Amazon – so often overlooked but is a quality company.
Likewise Bovis Homes, while cyclical, has an attractive enough valuation and through-cycle growth rates that should stand it in good stead.
UK equities are currently unloved.
The latest Bank of America Merrill Lynch Global Fund Manager Survey demonstrates this to good effect. The report says that global allocation to UK equities hit a record low in December, with 39 per cent of fund managers saying it is the region they would most like to underweight.
Arguably, this makes it a great buying opportunity.
Speaking to Mr Wilson last month, he agrees to a certain extent in that, while risk elsewhere in the world seems to be underpriced, there are pockets of the UK where the risk priced into stocks is too high.
But he warns you need to be very selective still. For example, he currently has no exposure to UK retail, which he says is under incredible structural pressure.
He has been building his position in Costain Group, which is fully exposed to the UK. It has been tarred with the same brush as Carillion so its share price is depressed, but has more than 25 per cent of its market cap in cash, whereas Carillion had high debts and its contracts are set up very differently with a revenue risk sharing model, whereby the customer shares in the risk and reward.
Mr Wilson has also added to Balfour Beatty. This mid-cap stock has around 50 per cent overseas exposure, and is a management turnaround story.
He also still holds Bovis Homes – another management change idea.
We've been very impressed with Mr Wilson so far and back him to continue the good work.
With assets under management of less than £50m, there is plenty of room to grow.
Darius McDermott is managing director at FundCalibre
