Collins Stewart takes UK focus
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The fund will comprise a concentrated portfolio of 20-30 stocks that represent fund manager David Shapiro’s best ideas. Collins Stewart says concentrated portfolios limits the portfolio to the best ideas, which should lower the risk of permanent capital loss. It also thinks fewer stocks helps the manager get to know the companies and management very well, while each company has a meaningful impact on the portfolio when share prices rise.
Shapiro has more than 20 years’ investment experience. He joined Collins Stewart last year, having previously been head of UK value at Morley Fund Management. He has also managed funds at UBS and will invest his own money in this fund, to align his interests with those of investors.
Shapiro will invest with a long-term view of three-five years rather than trade aggressively or make speculative investments. He will look for well-managed financially strong companies when their share prices are below his assessment of their real, or intrinsic, value. As a small fund, it will be able to invest wherever bargains are found.
Shapiro’s brand of value investing is popular in the US and Collins Stewart says it is an unusual approach to apply to UK equities.
There are three steps in the investment process Shapiro will use. The first stage involves screening a universe of 1,400 companies down to the best 100-150 value ideas. These may be special situations, spin-offs and companies with limited coverage or liquidity.
The second stage involves detailed analysis of these stocks, focusing on the accounts of the last five years the management, the company’s market position, sustainability of returns and growth prospects. It is important for Shapiro to understand the businesses so he will make visits to companies and their competitors. He will also draw on Collins Stewart’s Quest methodology, which calculates a cash based measure of return on capital.
The final stage of the investment process is constructing the portfolio. Shapiro will choose the best 20-30 stocks that represent good quality businesses that have a competitive advantage, strong balance sheets, growing free cash flow and the ability to produce good returns.
A strong sell discipline will underpin the investment process, with stocks being sold when the share price reaches its real value, when a better opportunity is found, when the future earnings power becomes severely impaired or when Shapiro believes capital is not being allocated sensibly by the management, which could impair returns.
UK equities are falling on the back of fears about a recession in the US and there could be further falls before the situation improves, which may put off investors. However, these conditions allow good companies to be bought at attractive prices, which could enable this fund’s investment strategy to flourish.
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