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Alpha beater

Fund managers Nicola York finds that Credit Suisse’s Leigh Harrison thinks alpha funds are coming back into style

Leigh Harrison likens the performance of his funds to a football team and says: “You are only as good as your last victory, aren’t you?” For him and his team, the victories seem to be numerous at present.

He runs the Credit Suisse alpha income, income retail and monthly income retail funds which have a five-year ranking to August 22 of 17th, sixth and seventh respectively in the UK equity income category.

Launched on September 1, 1986, the 103m Credit Suisse alpha income fund delivered a return of 38.3 per cent over five years against a sector average of 24 per cent. Harrison, who has managed the alpha fund since December 2001, took over the management of the income and monthly income funds from Bill Mott in August 2003.

Describing his style as value-oriented, he says he has a strong element of contrarianism and likes to invest in unpopular stocks and sectors, where he often finds value. He says: “Overall, our investment style as a house is strongly governed by thematics and top-down strategy, so even though I consider myself to be a contrarian or value investor, I think the areas of the market I tend to look in are strongly influenced by what I think are the big macro drivers for markets and economies.”

But even within this thematic approach he says there is a strong element of stockpicking in his investment style. Most of his time is spent filtering through company results, newsflow, attending meetings and generally keeping abreast of developments. “I tend to work more by talking to people rather than shutting myself in a room with loads of papers,” he says.

In his main portfolio, valued at 1,184m, there are usually between 80-90 holdings with a typical holding period of two to three years. Conversely, the alpha fund has a more aggressive style and is turned over every one to two years. He thinks alpha funds are coming into favour at present and he believes the market is going to become more focused on stockpicking rather than being a momentum and sector-driven market.

March, April and May were good months for his portfolios because he went very cautious on the market and made the portfolios a lot more defensive which meant they did very well while the markets were soft. He is also pleased by the “terrific” performance of his pharmaceutical stocks in the first half of this year, which he says were very unloved at the end of last year and were largely written off as worthless investments.

One of the top 10 holdings in the alpha fund is International Power, which makes up 3.7 per cent of the total, (figures as at July 29) and Harrison says this is not a typical income stock. “This was a stock which everyone hated because it got into a mess several years ago and we were able to buy into that significantly lower than the current price. It has probably doubled since we bought it and the outlook still looks reasonably good for it,” he says.

Harrison is keen on the aerospace sector at the moment, citing British Aerospace as another success story. He bought it at about 1.60 and it is now at 3.40 but he thinks it is still undervalued and sees no reason to sell yet.

The worst experience for Harrison so far this year has been Marconi’s disappointing performance. After being reasonably relaxed about it through the end of 2004, he says he stayed with the stock even when it lost the BT contract and the share price halved. “Really, there is no excuse for it because I was taking money out of stocks in that area and other high-beta stocks with actually stronger investment cases than the case for holding on to Marconi, when it was a straightforward bet on whether they would win that contract. I never considered as a possibility the idea that they might get none of it, which I feel was a distinct failing in my thinking, unfortunately.”

The intellectual challenge of trying to understand what is going to happen next in the market is what drives him. “I like to feel that I can understand how everything fits together and how it sort of works. I suppose the manifestation of that really is in outperforming the competition. If you can turn that understanding, because it is not knowledge but understanding that is important in this business, if you can turn that understanding to your advantage to construct a portfolio which outperforms the competition consistently then I think that really motivates me more than anything.”

He says he still expects to see positive returns from the equity market and would not be surprised to see the market 10 per cent higher in 12 months time but he does not think the big returns are likely to be repeated. “I think expectations have to be relatively modest because we live in a world now of low inflation, low growth, low interest rates and low returns, so as long as you are investing on the basis that you are not expecting to make your fortune overnight and you are prepared to be long term I think that is what equities will deliver for you.”

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