Head of UK Equities Derek lygo has reorganised the UK Equity investment process
First State Investment's head of UK equities, Derek Lygo, has reorganised the group's investment process and restructured the portfolios of its British and All Companies funds.
The £24.4m British fund, being run as an aggressive mid to large cap portfolio by Lygo, is to be renamed British Opportunities. It is now a special situations type vehicle with a relatively concentrated portfolio, typically with 40-60 stocks.
Since Lygo joined the group from Dresdner RCM earlier this year, he has set up three overall templates with different levels of risk that the funds and the group's clients will subsequently fall under.
The £247m First State All Companies portfolio has been altered and is now being run as the group's blue chip, low-risk vehicle, aiming for a tracking error of just 2% from the FTSE All-Share.
An example of the medium risk template, which has a tracking error of 4%-7%, is the UK portion of the Scottish American Investment Trust (Saints).
The British fund is now being run using the high risk template and aims to have a tracking error of 10% plus, Lygo said. Stock limits are held at plus or minus 5%, while sector bets are limited to plus or minus 10%.
Lygo said: 'All Companies was run on a sector-neutral basis, although the underlying stock selection was done on an active basis. We moved away from that model and are adding value through larger sector bets. For example, a couple of weeks ago we went underweight oil and added a lot of value through that position when oil stocks dropped.
'I have introduced other themes into the fund. I have been closing an underweight position in telecoms, especially in Vodafone and BT. Previously, the portfolio had too much in Cable & Wireless.
'Our position in banks is neutral, with a bias towards Barclays and Royal Bank of Scotland.
'I've also introduced a cyclical element. Recently I added a 0.5% weighting in British Airways.'
Lygo said he has so far changed about 25% of the British portfolio, with more to come. At the moment, the portfolio is approximately 5%-10% overweight mid caps with nothing in the smaller end of the market.
Lygo believes large caps are likely to underperform when the market returns to economic growth. He said he does not believe oils, pharmaceuticals or banks will have much to offer next year and, of the large cap defensive areas, only telecoms is likely to provide outperformance.
He added: 'Telecoms is having a bit of a renaissance and is the only one I see with a chance of outperforming. The world is looking geared against big stocks and there will be much better action in mid caps.'
Lygo has recently added a holding in Thistle Hotels to the British fund, which he noted had already provided a 20% uplift.
'It had been caned out of sight because of 11 September but our analysts identified that the investment cycle was largely complete,' he said. 'It was very cheap, offered good yield and a balance sheet robust enough to survive the difficult time. It was a classic recovery stock.'
Previously headed up by Martin Cobb, the British fund has suffered from underperformance. Over three years to 6 November it is ranked 236 out of 241 funds in the UK All Companies sector.
The initial charge on the All Companies fund is 4% initial and 1.25% annual, while for British it is 4% initial and 1.4% annual. Intermediary commission is 3% with 0.5% trail.
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