I am always on the lookout for younger fund managers who might become the next Nigel Thomas or Neil Woodford. Alex Savvides, manager of the JO Hambro UK dynamic fund, could be a contender. Few people will have heard of him and yet he has been running this fund for four years with considerable success, returning 27 per cent against a 7 per cent sector average.
At about £12m, the fund is small, although this can be advantageous as Mr Savvides should have no problems moving in and out of positions quickly. That said, if the fund were bigger, the process would largely be unaltered. He focuses on investing in companies that have experienced declining fortunes, perhaps where growth has disappointed or dividends have not met expectations but where there is scope for a U-turn. It is what might be classified a special-situations approach.
The twist is that to be considered for the portfolio, a share must pay a dividend. There is no minimum level and no yield target for the fund. He prefers companies with the discipline of paying a dividend because this has to be paid from cashflow. Dividends cannot be faked and if payouts fall, it is a sign things are going wrong.
Mr Savvides identifies three types of opportunity. First, the company has underperformed due to over-investment or mismanagement that can be turned round. Second, firms experiencing a change in fortune due to developments in their particular industry that investors have not fully understood – classic recovery stocks. Finally, those with easily identifiable balance sheet problems that need extra capital. In these instances, much of the bad news is often already priced in and you have a good chance of making a lot of money over the long term if the company survives.
Probably the best way to illustrate the fund is through some of the holdings. Of the 700 or so companies Mr Savvides screens, 150 make it through to face serious scrutiny.
About a third of these are chosen, producing a relatively concentrated portfolio. He looks for good-quality firms, with a long track record capable of self-help.
3i, the private equity company, is one example. Shares trade at a 35 per cent discount to the net asset value of its portfolio, although Mr Savvides believes this is closer to 55 per cent once the listed companies are stripped out. This offers a large margin of safety when buying the shares. 3i’s problems stem from a having high level of gearing during troubled periods but this has been reduced under a change of management. It is a high-conviction stock for him and one of his biggest positions at 3.5 per cent.
Another stock where he anticipates recovery is QinetiQ. Here, expensive debt to fund acquisitions to diversify the business has been a headwind against performance. New management has slashed debt but, so far, Mr Savvides believes the market has taken time to notice and today’s share price undervalues the company significantly.
Although Mr Savvides may be relatively new to fund management, he has 15 years’ experience under his belt, with eight of those at JO Hambro. I believe he is an exciting prospect. The one aspect of the fund I do not like is the performance fee calculated as 15 per cent of any outperformance of the FTSE All Share index. Not an unreasonable benchmark – I just dislike performance fees.
The fund does have a relatively low annual management charge to compensate and I think it is one to look out for. Given recent falls in the stockmarket, it should benefit from an eventual turn-round in sentiment.
Mark Dampier is head of research at Hargreaves Lansdown