F&C’s special situations fund has just turned one year old with 28-year-old fund manager Luke Newman at the helm. The economics and politics graduate is one of the youngest fund managers in the UK but he has been in the business half his life. From the tender age of 14, he spent his summers working at an investment firm in his home town of Bournemouth, where he became hooked on the stockmarket.
Newman started as a graduate at DWS, where he worked for five years on a high-risk private segregated fund. When he joined F&C late last year, he was given a blank canvas to choose any fund he fancied and he went for special sits.
He says: “I get most excited by those turn-round and restructuring situations and that is hard work because for every 10 companies that you spend time with and do the work on that have some of the characteristics, maybe only one or two will get to the point where I make an investment in them. I get very excited when there is complacency in the markets or investors’ views of a company and that is reflected in the share price and the valuation. If I work backwards and extrapolate what the market is telling me this company will do, I get very excited if there is a change of strategy or a change of dynamics which means that the future will not equal the past.”
Newman believes special sits in particular is a fund which requires a bit of risk-taking.
“If you feel you have an information advantage and there is an anomaly, then, even though it may feel very uncomfortable and this is exactly the fund to take those uncomfortable views, that is the time to make the investment. I say to investors that a lot of the time I will be buying investments against very poor newsflow and it will feel very uncomfortable for me but I have licence to build up positions gradually where I am convinced that there is valuation support.”
In its first year, the F&C special sits fund’s performance has been impressive. In November, the fund’s year to date figure was 18.44 per cent, outperforming the benchmark by 5.13 per cent.
When choosing companies for the portfolio, Newman separates them into two broad “buckets” – those that are undergoing some sort of change and those that are interesting from a valuation point of view.
In the change bucket, Newman groups turn-round and restructuring companies that have gone astray both operationally and in terms of the share price. He tends to look for catalysts such as a change of management, a refinancing event, a change of strategy or even a big disposal or acquisition which has changed the characteristics of the company.
The second grouping he uses is for companies that are also undergoing change but are not necessarily in a position of weakness.
The valuation bucket is also divided in two. The first group is new or burgeoning growth so can be either new companies or industries that are growing extremely fast. The second is unrecognised growth, which Newman says is the spine of the portfolio. Unrecognised growth tends to be long-term holdings in companies which have in the past and will in the future generate a lot of cash. These companies often find new projects to reinvest their cash within the business or acquisitions that can ensure their returns either remain the same or grow.
Newman says talking to the company’s operations manager can be the best gauge of its success and sustainability.
“It is all very well speaking to the chairman and the CEO but if you speak to the operational people to see if there is belief in the quality and the story makes sense beneath the board level, that can be really, really encouraging and give you indications that you would never pick up solely from studying the report and accounts.”
He is enthusiastic about the business and his biggest asset apart from his home is his stake in the special sits fund.
“Making money for the fund is what gets me up in the morning. I will happily see any number of companies in a day because you never know where the next opportunity is coming from and that is a great feeling.”
Newman is an avid traveller and is proud of one of his earliest trades while backpacking in Australia after university.
“We bought a car in Sydney, a huge, red convertible Holder which came with two tents, a volleyball net and had a huge number seven on the front. We bought it for about $400 Australian and we drove it the equivalent of London to Moscow as the crow flies and then we sold it for $800 when we got to Cairn. It was one of my first successful trades.”
Newman has even more impressive plans for the fund this year. “My aim is to repeat the successful start that the fund has had but in a sustainable way so what I am very keen not to do is run the fund in a manner that will not be consistent in the future.
“I have set myself liquidity and size limits at the bottom end to ensure that I can run the fund exactly the same way if it was bigger and that is as much an ambition as generating the same level of performance.”
Born: Bournemouth, May 3, 1978
Lives: Central London, near Tower Bridge
Career: 2005 to date: manager of special situations fund, F&C; 2000-2005: UK portfolio fund manager, Deutsche Asset Management
Likes: Football, Snowboarding, beaches and good food
Dislikes: Impolite people
Drives: Black Porsche
Favourite film: Top Gun
Favourite book: Life of Pi by Yann Martel
Favourite band: The Sugababes
Heroes: Steve Fletcher (AFC Bournemouth striker)
Career ambition: To make stacks of money for my investors
If I weren’t in this job I would be….. A commercial pilot