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Manager Focus: Glen Pratt

Glen Pratt has turned around the short-term performance of the Melchior UK Opportunities fund by reducing small-caps and backing cyclical stocks towards the end of last year.

The fund suffered from an extended period of underperformance in 2007 and 2008 following a strong start when it launched in 2006.

Over the past year to April 6, 2009, the fund fell 41.5% compared with the UK All Companies sector average fall of 29.2%, according to Financial Express.

However performance saw a boost in the past three months. From January 6 to April 6, the fund is up 2.3% whilst the peer group remains down 7.4%.

Pratt, who has experience working for Newton and Fidelity, blames the poor performance on over half of the portfolio being invested in smaller companies where there was a lack of liquidity. However in the fourth quarter of 2008, he took the view that markets had become too bearish on cyclical sectors and also reduced his small-cap exposure to a third of the fund.

For the first time in the three years he run the fund he bought miners, housebuilders, real estate and retailers.

“I timed the entry into cyclical stocks very well and some of the smaller companies stocks have also performed well so far this year. Both have given us decent momentum.”

Pratt says he is a contrarian investor so backing these sectors at a time when they were out of favour is not an unusual move on the fund. He looks for companies that fall into three pools; turnaround companies, unrecognised growth or valuation anomalies.

He describes turnaround stocks as companies that have been through a tough time in terms of performance, but new management has come in to improve operational problems and profit. Unrecognised growth stories are those that are growing fairly quickly, but the market has failed to pick up on as they operate in a niche market which only a few analysts cover.

Pratt adds: “Companies with valuation anomalies have good profits and performance but the sector they are in is out of favour. I have been adding to real estate and miners for this category.”

Examples include Land Securities, which Pratt says is trading 20% to 30% below its true intrinsic value and Rio Tinto.

“We do a lot of screening work as there are a whole range of stocks where the valuations are extremely low on any long-term basis. All through 2006 and 2007 we took the view that Rio Tinto’s intrinsic value was £35 a share, based on our net present value of future profits. During the mining bull run Rio was trading at £65 a share but within six months it was down to £10. However our assessment of intrinsic value went from £35 to £30 a share. This analysis got us to buy Rio shares for £10.”

Around 20% of the fund is now invested in cyclical stocks including BHP Billiton, Aquarious Platinum, Work Space, Bovis Homes, Persimmon, Next and M&S. Despite the recent rally in these sectors Pratt says he is sticking with these stocks in anticipation of the markets discounting an improvement in the economy.

“Clearly the world is going through a bad recession and it may well get worse. Normally stockmarkets will discount by about 12 months any improvement in the economy. We have already seen the stockmarket is looking ahead as leading indicators are starting to stabilise. The money supply in the UK is starting to grow again, consumer confidence has started to stabilise and some of the commodity prices have started to go up again. They are all leading indicators that suggest 12 months from now the economy will start to improve.”


Competitive edge

Having previously used Transact to a limited extent, we started to use them more extensively in 2006 when we switched our equity fund recommendations from actively managed to passively managed funds.

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