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M&G back with the leaders

There has been a significant change in M&G over the past two or three years – they have started to perform!

Under chief investment officer David Jane, a more pragmatic investment approach has been adopted.

“Old” M&G staff such as Tom Dobell and Graham French seem rejuvenated while other experienced managers have been added, such as Michael Felton, Simon Murphy and Simon Bailey to name but a few. Performance is truly coming through and, importantly, when I visit M&G (and this is an intuitive feeling), the whole atmosphere seems to have changed for the better.

This week, I thought I would concentrate on one rising star who has had very little publicity – Aled Smith. I think he has the potential to be one of the best known fund managers in the future, if I have not just put a curse on him!

Aled joined M&G in December 2000, after eight years at JP Morgan as a senior media analyst. He was also rated a top buy-side analyst by Institutional Investor magazine. He took over M&G global leaders in September 2002 – also look out for the M&G American fund which he took over in December 2004 and the global technology fund in June 2005.

Global funds have long been the backwater of the unit trust industry. This has always struck me as rather strange as you might expect this to be the first stop for novice investors. But lack of resources and lack of marketing have often meant this has remained a backwater. In my view, this is no longer the case.

Corporate pensions and Sipps demand better general funds so it is a huge opportunity for investment companies to grab a big slice of the pension market. I believe global leaders could be well placed to be part of this.

The investment approach is very much bottom-up and Aled has a defined active investment approach which exclusively looks at the dynamics of companies. In many respects, the way to look at this fund is as a global recovery fund. What Aled is looking for are basically two factors – a change already affecting a company’s performance and/or a change to management attitude to the company.

Inevitably, share price usually lags this change so if Aled can spot this early, he can get in well ahead of the pack and capture the best part of the share price gain. He uses the Holt valuation tool which many other fund managers use to help him screen some 18,000 global companies.

However, what makes him different is the way that he uses Holt and the way that he is adapting it to his own needs. Perhaps the closest thing to this is the Artemis SmartGarp system but I should state that the data and approach is still very different. In using Holt, he is looking for changes in cashflow return on investment – companies that are returning more than their cost of capital. You might think this is an obvious aim of any company but it is amazing how many firm get lost buying businesses which do exactly the opposite.

Within the Holt system, he is looking for companies that are restructuring their allocation to capital more efficiently. Aled and the global team, which includes Graham French and seven analysts also try and spot a change in management attitude. Clearly, this is something more difficult to ascertain. These types of restructuring measures are dependent on internal changes rather than something which can be seen to a wider audience.

Companies that fall into Aled’s remit include IBM, where management became complacent and lost its customer base but a major restructuring turned the company round. In Japan Sony and Yamaha Motor are both examples of companies which got carried away with ambitious growth plans and effectively lost their way. But Aled spotted the changes going on in both companies and both stocks can be found in his top 10.

The fund’s sector breakdown shows big overweights in industrials, basic materials and oil and gas. The biggest country positions are in the US at 29.5 per cent, Japan at 17.8 per cent and Germany at 9.1 per cent but remember this is just a by-product of the stock selection.

M&G global leaders shows all the signs of becoming a genuine flagship fund along the lines that some of the generalist investment trusts have been for many years. For clients looking for international exposure but not wanting to make specific bets themselves, this could be an ideal component within a global portfolio.

Mark Dampier is head of research at Hargreaves Lansdown

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