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Theory of national selection

I make no apologies for returning to M&G after just a couple of weeks but this time I thought I would look at one of its UK funds, M&G UK select, which has been run by Mike Felton since January 2005.

Before I even entered the industry, I can remember the M&G adverts on the Underground showing the spectacular performance of its recovery fund. When I started in financial services over 22 years ago, it was virtually inconceivable not to use an M&G fund. However, somewhere in the 1990s the firm lost its way, possibly becoming too dogmatic over its value style.

There is no doubt that, under David James’s stewardship, M&G has developed a pool of individual and more focused managers. Some, Graham French, Tom Dobell and Richard Hughes, have always been there. Others have been parachuted in to help rejuvenate the team.

Felton joined from Isis, where he was running the prime fund and was also head of retail equities.

With so many UK funds to choose from, I think it is important to try and pigeonhole the M&G UK select fund. Effectively, it is a focused portfolio with 30 to 40 holdings.

It is clearly designed to outperform the Investment Management Association’s UK all companies sector and obtain a level of volatility that is lower on average than its peer group of UK focus funds. It is designed to go anywhere without being constrained by an index. At its core will be a number of predominantly blue-chip stocks which can be held for the long term and around this are grouped satellite stocks, more like special situations, which have the potential to generate better performance in the short term. The style is very much bottom-up and pragmatic without being boxed into predetermined investment styles of growth or value.

This approach is something that I agree with. Why on earth be boxed in by rigid styles and benchmarks? A private investor would expect a fund manager to buy only on one pretext and that is that the share they are buying is cheap and likely to make absolute returns.

One of the great advantages that M&G has, now that it has been bought by the Pru, is the almost unrivalled access to company management. Company meetings are a very valuable source of information. M&G has 10 UK analysts researching stocks and, while Felton does not have to rely entirely on them, they free up time for him to consider the construction of the portfolio and the timing of investment.

Valuation is an important element and Felton has to be flexible as not all companies fit into a box purely on a price-earnings ratio basis.

He also needs to look at what is already in the price and look at the company’s level of liquidity and risk. This is important as he can take big positions in stocks he likes. Core stocks could be weighted up to 10 per cent whereas satellite stocks rarely exceed 5 per cent.

His top three holdings are BP at 8.7 per cent, RBOS at 6.9 per cent and HSBC at 6.8 per cent. Perhaps what is more interesting is to look at some of his biggest overweights relative to the All Share. These include the Pru, Countrywide Lloyds TSB Resolution and Crest Nicholson.

The fund size at 337m still gives it considerable flexibility and liquidity should not be a problem. The fund has almost 63 per cent in large caps, 32 per cent in mid caps, with only 3.4 per cent in smaller companies. As a focused fund, it is not intended as a core holding but perhaps something that would dovetail with a mainstream fund such as M&G UK growth or, outside M&G, perhaps something like Lazard UK alpha fund.

That said, I would argue that for a long-term investor, focused funds such as this are arguably far more of a core holding as I believe clients are interested in making absolute money, not relative returns against benchmarks. If you are looking at focused funds, Felton should be a worthy inclusion on your list.


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