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Value in a sabbatical

Every time you hear the word sabbatical in connection with a fund manager, the first thing that springs to mind is that the manager will not be returning.

He or she has either got a better offer elsewhere or has made so much money that they will be retiring to a desert island to contemplate their navel.

A few do have genuine reasons for not returning but, for most, a better job elsewhere is the normal reason.

One such manager who took a sabbatical last autumn and has returned is Clive Beagles, manager of the JO Hambro equity income fund.

Clive came in recently to discuss the reasons for his sabbatical (health-related) and the recent performance of the fund. It looks as if six months off has done him the world of good as he looks refreshed and ready for the challenge ahead.

He is keen to turn round the recent poor performance, although he is honest enough to admit that his illness was no excuse for last year’s underperformance – he simply got some of he bets wrong. Too much was invested in companies exposed to the credit crunch, the liquidity crisis and the banking sector in general.

He does not want the fund to act like a warrant on the financial sector so exposure to the theme has been cut.

As well as recuperating and recharging his batteries, Clive found his sabbatical useful as it enabled him to re-evaluate first whether he wanted to continue in fund management (he does) and, second, it gave him the opportunity to evaluate his style and process almost from arm’s length.

His conclusion was that the process was still sound but that JO Hambro as a whole could benefit from fund managers bouncing more ideas off each other.

To recap briefly, Clive believes that a value-driven approach will outperform over time. He also expects income to represent a significant proportion of total returns. The process focuses on the yield of the underlying company, which has to be above the FTSE All Share yield at all times (on a prospective basis).

Beagles believes that having this strict criteria helps keep emotion out of managing a portfolio and stops him falling in love with a stock.

He naturally hunts in the FTSE 350, although he can and will on occasion own small-cap stocks.

Clive still believes that dividends are an important indicator for future profits, although he thinks there will be selective dividend cuts from UK companies.

At the moment, “kid in a sweet shop” is the phrase that springs to mind as there are more than 150 stocks that currently meet the yield criteria.

Companies being sought are ones that can exploit the current situation – in the banking world, for example, he has been looking at Lloyds, which has had less exposure to the sub-prime crisis and a generally stronger balance sheet than many of its peers.

Currently, just over 25 per cent of the fund is invested in defensive or core growth areas. Companies include Vodafone (the biggest holding in the portfolio), BAT and Centrica. Other favoured areas include the insurance sector where dividend yields are looking attractive.

Clive has reiterated his commitment to the fund, in that he is not just coming back for six months to see how it goes – he is back properly for at least a five-year term.

The fund size has shrunk from more than £500m to less than £200m in the past six months, making it highly manoeuvrable.

Clive’s co-manager, James Lowen, looked after the fund in his absence and has now been rewarded with an equal share of the performance and management fee.

Clive feels he left James in the lurch and therefore his promotion is more than justified. The early signs are encouraging and Clive is an able and experienced investor and one who I would expect to outperform over time.

Ben Yearsley is investment manager at Hargreaves Lansdown

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