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Fund manager profile Merrill Lynch’s special situations star Richard Plackett’s funds are being seen as serious alternatives to Fidelity’s giant fund after spectacular outperformance says Nicola York

Richard Plackett is proving to be an astute juggler in running Merrill Lynch’s UK special situations and UK smaller companies funds.

Managing the two funds means that he and his team – Mike Prentis, Ralph Cox and Roland Arnold – have met more than 700 companies over the past year.

His UK smaller companies fund is ranked fourth over three years to January 23, 2006, delivering a return of 159.9 per cent against a UK smaller companies sector average of 113.3 per cent.

The UK special situations fund is ranked 15th in the UK all companies sector over five years to January 23.

Over one year, it has outperformed Anthony Bolton’s Fidelity special situations fund, returning 32 per cent against Bolton’s 29 per cent. This ranks the Merrill Lynch fund at sixth over one year compared with Bolton’s ranking of 22nd.

Plackett’s fund is seen by many industry commentators as a natural alternative to the Fidelity fund. Plackett says: “We are getting some good inflows at the moment. We hope it is because of our own performance and the fact that we are near the top of the peer group rather than what is happening in other fund manager businesses.

“People do ask us about Anthony Bolton. All you can say is he has proved himself to be certainly one of the outstanding if not the outstanding fund manager of his generation over 15 years or more. It is extremely flattering to be mentioned as a possible alternative if that is what people are doing. All we can do is stick to what we try and be good at now – identifying winning companies – and if people want to make comparisons and buy our fund, then it is up to them.”

After gaining an economics degree at Cambridge, Plackett trained as a chartered accountant with Pricewaterhouse Coopers before joining venture capital firm 3i in 1989. In 1994, he was given the opportunity to move into fund management at 3i.

At the start of 1997, he took over M&G’s smaller companies fund, which at the time was the worst-performing fund in its peer group over three years.

Plackett turned round the fund’s performance and also took on M&G’s income funds with similar success. He became involved in the senior management of M&G but, realising that he preferred a pure investment role, was attracted to Merrill Lynch in 2002 because there would be no management responsibilities.

Having run the 125m UK smaller companies fund since November 2002, he took over the UK special situations fund just over 18 months ago. He says the portfolios are run with fundamentally the same investment process. “They both invest predominantly in small- and mid-caps and have a number of holdings in common. I am very lucky to be supported by a team and especially three other very talented fund managers who I work closely with.”

Plackett’s investment philosophy is founded on the principle that successful companies have five key sets of criteria in common. To be chosen from the 1,500 companies in this universe, the management team have first got to have certain strengths including enthusiasm, selling skills and inclusive cultures.

The other four criteria are real barriers to entry, cash generation, a good long-term track record with evidence of good short-term earnings’ momentum and a strong balance sheet.

Plackett says: “We only want to invest in companies that generate cash because it helps us to avoid disasters and a lot of investment is about avoiding disasters and you tend to avoid disasters if you stick to cash-generative companies.”

He admits it is demanding trying to find companies which fulfil all five criteria but says both funds are at their full quota of stocks. UK special sits will typically hold around 60 stocks and the smaller companies portfolio will have between 100 and 110 holdings.

The funds are currently overweight on companies trading on a global basis. Plackett says this is because the global economy is growing at around 4 per cent a year, with a big emphasis on emerging markets. He is nervous about companies with too great an exposure to the UK consumer economy because UK economic growth is around 1.5 per cent a year.

“Consumer expenditure in the UK is relatively weak and we do not really see these trends changing. We think there are significant supply-side issues in retailing. Effectively, there is over-capacity,” he says.

There is a ruthlessness in Plackett’s style which he says is essential to good performance.

He warns of the perils of “falling in love” with a stock, which he says is a classic symptom of the small-cap investor.

“It is very important to have rigorous rules in place. If companies disappoint and have earning’s downgrades, you sell and move to the next one.”

This approach extends to the construction of the UK smaller companies fund, which includes CSR, ITE Group and Rotork in its top 10 holdings. Plackett says 50 core holdings are kept at an average of 1.5 per cent each of the fund while 50 high-risk holdings average 0.5 per cent each. “If we have set a target weight to a stock, we will stick to it.”

He believes the macro-economic backdrop is not about to change very much so the focus in the small and mid-cap market will be on individual companies’ performance. But he adds: “It is important for us not to rest on the laurels of our recent performance because you never know what is going to happen tomorrow.”

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