exeter hidden value portfolio adopts multi-thematic approach to search out growth and value situations in the UK market
Exeter Fund Manager's first all-equity Oeic sub-fund, the Exeter Hidden Value Portfolio, has outperformed its peers by more than 10% since its launch last October.
The fund, managed by Geoff Miller and Andrew Hobson, has beaten the UK All Companies sector by 10.6%, from launch to 28 February 2002, according to statistics from Lipper.
It has returned 11.8% since 31 October 2001 to 28 February 2002, compared with the UK All Companies sector, which has returned on average -1.2%. Over three months, on a bid-to-bid basis, it has returned 2.4% compared with the sector average -1.4%.
The fund is unbenchmarked, targeting absolute returns by investing on a bottom-up stock-picking basis, looking at individual company fundamentals and various themes in the market. It adopts a multi-thematic approach in its search for hidden growth and value situations in the UK market.
While this is Exeter's pure equity open-ended fund, it has other portfolios which contain an element of directly held equities. Miller, head of direct equities at the group, joined in July 1999 and was previously investment director at Brewin Dolphin. Miller is responsible for leading the research selection of the equities component of Exeter's open- and closed-ended funds and also manages the Exeter High Income Fund, and the group's Financials and Equity Growth & Income investment trusts.
Hobson joined the group last year as part of the equities team. He manages the portfolio on a day-to-day basis, responsible for the trading of stocks, as well as the Exeter Money Market Fund. He works alongside Miller on the equity portfolios of the Equity Income Fund and the group's Financials and Equity Growth & Income investment trusts.
Miller and Hodson answered Investment Week's questions.
What is your investment process?
We have five core thematic sectors we look at as long-term growth areas: energy, healthcare, technology, financials and outsourcing, which is where we look for opportunities.
However, we do not just buy stocks in these five areas:s we take a pragmatic approach, and look on a quantitative basis for growth opportunities across the market as a whole. The more rigid you are, the more you exclude yourself in overlooked situations.
How do you approach analysing business?
Understanding the dynamics of a business is vital. We buy stocks because we think they will go up and sell if we think they will go down. We are looking for significant outperformance, to do this you need to know the firms and why you are investing in them, so you know when they are under- and overvalued. We try to assess where a firm can get to, and when it reaches that point, we sell it. As the fund is small we have the potential to sell undervalued firms in the portfolio quickly.
What level of market cap are you focusing on at the moment?
Small and mid caps are the focus at present. We do have large caps in the portfolio, such as CGNU, but only if we see value in them.
We like the healthcare sector, but we do not hold any of the large caps, as we do not see any value in them. The large companies need lots of drugs to perform well, the smaller pharma- ceutical companies have more growth prospects.
Generally, in each of the areas, except in oil where there is more value in larger caps, there is more value in the smaller end of the market. We assess earnings potential, but do not see much value in large caps. However, if we see a company we like, we will buy it.
Where are you seeing opportunities at present?
Over the last month outsourcing has enjoyed more of a weighting in the portfolio. The bearish market has provided more opportunities in this area.
We are invested in firms that are exposed to healthcare, infrastructure and education. The public sector is high on the Government agenda, so there will be a lot of cashflow in these firms.
In an ideal world, we want a business in a growing market, with a growing market share and which is growing its profit margin. A good example of this is Comeleon, which has developed an imaging technology that enables it to print full colour pictures onto a wider range of materials.
This can be used for personalising and customising consumer electronic items such as mobile phones and computer mice. There is a lot of potential to make more profit in three years than its current market cap. The risk/reward trade-off is very attractive, and it has a growing market share.
What do you look for in the companies in which you invest?
We look for companies that have consistently exceeded their financial aims. We look to find businesses with a culture of success, which is especially important for early stage companies.
To do this we look at several aspects. Meeting the management is very important, we want to find out how they view the company themselves, and how that compares with reality. Having looked at this, we look at the company's track record, its customers, suppliers and its peer group. We look at how the peer group sees the company and how they all see the environment they are in. We also look at the company's strategy and then analyse whether this and their overall aims are achievable.
We do not depend on the information from brokers, we use this as an add-on to our own internal research. Provincial brokers can provide more useful local knowledge and niche brokers, which specialise in a particular area, are the ones that can add value for us, finding areas where others are not looking.
How do you manage risk in the portfolio?
We do this in two ways. First, through ensuring a broad diversity of sectors in the portfolio, meaning there is never just one particular focus on a single theme. We are looking to have a wide variety of stocks, some linked to the market, some not.
Second, we look at price targets, assessing earnings growth over a 12-month period and there is an expected rolling return over this time period. These expected returns vary from area to area, and we focus on profits for earnings growth, rather than the potential for re-ratings.
Where have you been taking profits from so far?
Profits have been taken out of biotechs, Aberdeen Fund Management and an industrial holding in ICI. The money we have taken has been put into outsourcing and oil companies. Both of these areas had fallen back because of a lack of interest and we are now seeing this interest returning again.
How many holdings so you have in the portfolio?
We invest in 30-40 holdings. At present we have 38 in the portfolio as we see more opportunities in the market at the moment. We would reduce this number if we felt there were not as many opportunities. We also hold a small amount of cash but this level will never be very high as we are not paid to manage cash. The surest way to underperform is to hold cash, and you will eventually get caught out doing so, so we will always be fully invested.
What is your outlook for the market going forward?
Over the next few months we see the market as very difficult as we see little value in the largest stocks in the largest sectors. We do not hold telecoms, as they still look too expensive and banks look fully valued, as do pharmaceuticals. So we do not see the index moving that far from here.
Underlying this, the economy is recovering. Selectively, there will be some good returns, but this will not be fully reflected in the index because it will be held back by the larger stocks within it.
Joined in July 1999 as head of Exeter's UK equity team.
1998-1999: director and group strategist at Brewin Dolphin. He was also the chairman of the asset allocation committee.
1994-1998: head of the research department and group strategist at Wise-Speke.
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