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Hanging on the telephone

The impact of Marconi’s share price collapse highlights the effect that a single stock can have on a fund manager’s performance.

Several leading fund managers, including Invesco Per-petual’s Neil Woodford and Fidelity’s Anthony Bolton, fell foul of the telecoms equipment-maker’s share price plummeting by 43 per cent in two days recently following the news that it had missed out on BT’s tender for a 10bn network upgrade.

Invesco Perpetual, the country’s second-biggest fund firm, held almost a quarter of Marconi’s equity, spread across Woodford’s high-in-come and income funds and Ed Burke’s UK aggressive and UK growth portfolios. Burke had the biggest percentage holding at 4.2 per cent in his 92m UK aggressive mandate, a popular fund with IFAs after three years of very strong outperformance that has left it firmly ensconced in the top quintile of the UK all companies sector. Woodford held 2.5 per cent in his two funds and Bolton had similar exposure in his 4.79bn special situations portfolio.

Burke’s aggressive fund is a concentrated portfolio of 24 stocks, so holdings are typically bigger than the average core UK equity mandate. Marconi’s troubles have cost the fund 2 per cent.

Hargreaves Lansdown head of investment research Mark Dampier says every fund manager has bought a nightmare stock at some point in their career and a one-off situation, such as Marconi, should not really cloud one’s view of a fund manager.

He says: “An individual stock can go wrong on any fund manager but with a more concentrated portfolio a stock that goes down the toilet will have a greater impact on performance. Marconi took about 2 per cent off Burke’s performance in one day and that can often be enough to push you into the fourth quartile.”

Peter Walls, manager of Unicorn Master trust, the top-performing active managed fund over three years, says stock blow-ups are inevitable and as long as the manager gets more decisions right than he gets wrong, then he should still outperform.

Walls says: “If you get six out of 10 stockpicks right, then you should be getting into the upper quartiles of perform- ance. People get too carried away focusing on the duds.”

A couple of other high-profile concentrated funds were also significant holders of Marconi equity, including Schroder UK alpha plus and Gartmore UK focus. Last week’s events also highlight the difficulty for advisers and clients when choosing bet-ween focused conviction- led portfolios and tracker or quasi-index-tracking funds.

Marconi is a FTSE 250 stock so tracker funds would never have held such a high percentage of the stock as Burke did. Then again, his UK aggressive fund has returned 70.8 per cent over three years to April, before charges, compared with 5.5 per cent from the UK’s big-gest retail index tracker, the 3.1bn L&G index fund. By way of comparison, the average UK all companies fund is up by 9.7 per cent, according to Standard & Poor’s.

As a firm proponent of small and mid caps, Walls rejects the notion that more fledgling names are higher risk, saying Marconi was a FTSE 100 stock a few years ago. He also points out that trackers and most UK equity funds, because of benchmarking, were forced to hold up to 9 per cent of Vodafone as its share price slid from 400p in early 2000 down to 81p in Dec-ember 2002.

Cavendish UK opportuni-ties fund manager Paul Mum- ford and Walls say due diligence is key when selecting a stock. Mumford did not buy into Marconi because he thought that as 26 per cent of its revenues came from BT, it was too highly geared into the one client and he feared its technology was overpriced and outdated, an ass- essment clearly shared by BT.

He says: “Marconi had a lot of its eggs in one basket and the current situation shows the risks of companies being reliant too much on one particular customer.”

Aegon Global Technology fund manager Chris Ford says one-day drops of this mag- nitude are rare in the sector nowadays.

He says: “The level of vol-atility is not there anymore and while this looks like a return to the bad old days, it has to be remembered the fall is not because Marconi is a technology stock but because it is a mid cap with massive customer concentration.”

Marconi was seen as a recovery play after its past problems, says Walls, but growth stocks are not without their problems as they will normally be in less mature business sectors and are often more prone to volatility.

Individual stock risk is important but Dampier says the greatest risk to fund managers and investors is sector or geographic exposure.

He says: “The biggest problem is if a whole sector has a problem and this will affect a fund a lot more because the manager might have 20 per cent invested in it.

Investments should be viewed as long-term holdings, says Dampier, and underlines the importance of holding a diversified basket of stocks.

So, although Burke and several other fund managers will see a short-term dip in their performance figures, it is unfair to throw this one dodgy judgement call in their faces. After all, the likes of Burke, and Woodford and Bolton in particular, have outperformed the market not only massively, but consistently, too.


Chilton on Mortgages

Topically, I should be reviewing the first six months of FSA regulation which passed over the bank holiday. Instead, I am going to focus on the cost impact of the Victorian approach that the majority of lenders are burdening the industry with, perhaps appropriate at a time when MG Rover collapses due to years of failing to move with the times.

All or nothing

Philip Scott looks at rise and fall of the giant UK All Companies sector.


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