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Funds for all seasons

UK all companies managers able to identify value are translating unpredictable markets into consistent long-term performance. James Smith reports

Despite average losses of 14 per cent over a summer of volatility, top-performing UK all companies managers are eyeing value opportunities.

Funds leading the peer group over three years to mid-October remain broadly the same as a year ago, their consistency highlighted by both top-decile one-year and three-year numbers.

Far ahead of the pack over a three and five-year timescale is the Legal & General UK alpha portfolio run by Richard Penny, who has used his barbell strategy to maximum effect in recent years.

In 2009 and early 2010, he undertook a substantial amount of recovery investing and the deep-value side of his fund was approaching 60 per cent of assets. Much of this was in so-called fallen angels, as battered mid-caps fell down into smaller companies indices.

“These were fundamentally good businesses with strong management and we took a view they were underpriced,” he says. “We capitalised on them before most investors could take a position. Some were also prevented from doing so by their mandates.”

Penny says growth was more prevalent later in 2010 and into this year. Investors increased the rating they were paying for stocks as the market rose, leading him to sell out of some names.

Recent sales included SuperGroup, which Penny bought at £5 in April 2010. He gradually revised his target price upwards, eventually selling at £17.50 when he felt the company’s prospects were reflected in the valuation.

Price versus valuation discipline is key to his process. Penny exploits periods of volatility when the discrepancy between the two is at its widest. He cites stocks such as Hutchison China MediTech becoming extremely oversold in 2008 as an example.

He says: “In the flight to quality, the company suffered from being Aim-listed, under £100m and linked to China, but sale and profits were strong throughout the period. We bought several such names in early 2009 and have benefited from a subsequent appreciation in price.”

Current volatility means Penny is focusing on various potential refinancing situations as well as economically resilient areas that served him well in 2008. Apart from medical diagnostics, this includes data centres and spread-betting firms, the latter a prime example of an area that can thrive in unpredictable markets.

He is also beginning to look at retail opportunities in stocks such as Home Retail and Halfords and is generally more positive on mega-caps, with many of the top 20 to 30 names in the market extremely cheap.

Mark Slater can stake a claim as the sector’s most consistent performer, with top-decile funds over three and five years and three of the best 15 performers over 12 months.

On his Slater growth fund, the sector’s strongest portfolio for 2010, he focused on investing in dynamic and cash-generative growth companies at sensible prices.

“The average UK quoted company has lacklustre prospects but well selected growth businesses operating in global niches have continued to produce strong earnings’ growth and attract investors,” he says.

He refined the process on the vehicle last year, introducing a purer focus on companies with low price-to-earnings’ growth and stocks with good earnings.

This removes the majority of stocks, after which Slater identifies those with cashflow per share in excess of earnings per share, which he says removes every big corporate fraud of the last 40 years. After that, he begins the qualitative work to try and identify whether current business growth is sustainable.

“Our holdings tend to be in either fast-growing or niche areas as companies able to show consistently dynamic earnings’ growth will be re-rated upwards, particularly in more difficult markets,” he says.

Similar to Penny, Slater flags stocks such as Hutchison China with strong turnover and no debt, despite a big fall in August.

“This company is exposed to the China theme but a healthcare stock is not dependent on whether GDP grows by 6 or 9 per cent, whereas commodity plays are,” he says.

Slater prefers to invest in companies capable of growing in all conditions. “We have been careful to avoid stocks and sectors that are consumer-facing or exposed to Government cuts,” he says.

With midcaps broadly outperforming the FTSE 100 over the last decade, it is no surprise to find portfolios focused on this area among the best UK all companies offerings.

Rensburg UK mid-cap growth is the pick of these, ranking fourth in the sector over five years and 10th over three. Manager Paul Spencer highlights the midcap benchmark’s diversity as a key advantage over the FTSE 100, with oil and gas producers just 4 per cent against more than 20 per cent.

He highlights three recent calls, with the last of these fairly contrarian. “In 2009, we were overweight UK cyclical recovery stocks and the portfolio had a 60/40 per cent UK/overseas operating profit split, which was beneficial as the market bounced hard from the bottom,” he says.

“Last year, we shifted this to a 65/35 per cent split in favour of overseas. We gained from that exposure as the UK recovery stuttered and the market rewarded companies with foreign presence, particularly emerging countries.

“The fund has now moved back towards a 50/50 split and we sold down Dana Petroleum and bought in Britvic and Persimmon to change the skew.”

He says a crowded trade has developed in companies with overseas exposure and genuine valuation anomalies are emerging in domestic stocks. “We have not re-entered high-street retail names, buying into areas such as wealth management instead,” says Spencer.

Elsewhere, Lindsell Train UK equity has continued to climb the rankings and manager Nick Train highlights the fact it has done this with no investment whatsoever in precious metals and other commodities.

“The fund has benefited, albeit tangentially, from the commodity bull market and several of our favoured companies are bound to suffer when it fizzles out,” he says. “Nevertheless, holding no commodity stocks means the fund offers diversification against any shift in investor preference away from the complex.”

Train continues to favour technology and media stocks, particularly those executing credible internet strategies. He says: “One of the biggest drivers of capitalism and stock prices is the productivity gains delivered by the application of new technologies.”

“Such gains have always been accompanied by irrational exuberance. The key is to recognise excesses and we are only at the early stages of a new and likely multi-year bull market in internet or internet-facing companies.”

More recently, Train has also been directing money into solid dividend-paying stocks. He says: “Perhaps this is premature but I do not have a better investment idea than to increase holdings in proven brands or franchises that offer dividend yields higher than a gilt, growing dividends in line or ahead of inflation.”


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