Funds that combined a bottom up and top down stock selection process were among the best performing ...
Funds that combined a bottom up and top down stock selection process were among the best performing unit trusts in the Europe ex UK sector over the three years to June 2000.
The Gartmore European Selected Opportunities Fund's performance was fourth out of 100 in the Europe ex UK sector over the three year period.
The fund followed Invesco GT European Growth, Invesco European Exempt and Cazenove European in terms of performance.
Now worth £1.94bn, the frAAA Gartmore European Selected returned 34.68% over the 36 month period to June 2000, outperforming the sector average of 25.76%.
Roger Guy, fund manager, said 50% of the portfolio is consistent with the alpha model portfolio constructed by Gartmore's whole European team. This portion of the fund is a low risk portfolio of what the team believes to be the best European blue chip companies, selected on the basis that they will deliver unexpected earnings growth.
The other half of the portfolio represents the fund manager's selection of ideas generated by the team and by Gartmore's in-house research-ers. The stocks are selected from a bottom-up perspective on a short to medium term time horizon.
Guy said: "We analyse the company's franchise and the industry that it operates within. We look at the quality of the management and whether they have a good niche position in the market."
The portfolio holds 60-90 stocks at any one time and is benchmarked against the FT Europe ex UK index.
The annualised standard deviation (ASD) of the fund is 25.42%, which is above the sector average of 22.89%. The alpha is 6.12, versus the sector average of 0.30 and the beta is 1.14.
Guy said there are strict disciplines in place to try and ensure consistency of returns. These include a maximum exposure to a stock 5% higher than its index weightings, a limit of only 1% of the fund being invested in any single smaller company and a cap of only 15 small cap holdings at the one time. There are also controls on the extent of sector and country bets, against the index.
Guy added: "Historically the volatility of the portfolio has been very low in comparison to the returns achieved, thanks to the use of these disciplines. However, we started the year overweight the telecom, media and technology sectors, which have been unusually volatile, and this has been reflected in the portfolio."
Going forward, the fund is underweight the financials sector, utilities, transport and consumer goods, while being overweight energy, capital goods and basic industries, with a particular focus on information technology and chemicals companies at the moment. The portfolio has moved from an overweight position in telecom service companies to a more neutral stance following the sale of part of its Nokia and Ericsson holdings, and has reduced its overweight position in the IT sector.
Guy said: "We have been neutralising some of the bets we entered the year with in the portfolio, reducing the extent of some of our overweight positions, and adding to areas where we were very underweight. For example we recently purchased L'Oreal and Gucci, which are benefiting from recovery in Asia. We are also no longer as sceptical on the financial sector as we were, adding to insurers and a number of well positioned banks on a three to six month view."
Although country allocation has little bearing in the portfolio construction process, Guy does take country weightings into account to ensure that stock selection has not become too concentrated in any area.
He said: "We have been adding to Germany, based on the pending tax changes."
Top holdings in the portfolio include Total Fina Elf at 3.8%, ASM Lithography at 3.5%, and Nokia and Ericsson, at 3.4% each. Telefonica accounts for 3% while Royal Dutch Petroleum makes up 2.9%, Roche is 2.4% and Alcatel and Bayer each have a 2.3% weighting.
The Royal London European Growth portfolio returned 33.76%, outperforming the sector average of 25.76%. That performance placed it seventh in the sector.
The fund also had a lower than average ASD, which was 22.20%, compared to the sector average of 22.89%. The annualised alpha of the fund was 9.28 compared to the sector average of 0.3, and the beta was 0.95.
Mark Greenhoff, fund manager of Royal London European Growth, said the portfolio is based primarily on a bottom up stock picking process, however he also applies top down macro scenarios to help determine sector weightings He said: "The influence of macro economic factors on the portfolio is greatest at inflexion points of economic trends. Thus economic growth indicators and interest rate expectations are monitored closely.
At a stock level Greenhoff visits companies on a regular basis as a source of investment ideas and to help gauge management quality. He will only invest in companies where management have attractive strategies and aim to create shareholder value.
Once he feels a stock has reached fair value it will be sold to fund new, undervalued investment ideas. The portfolio, therefore, tends to have a reasonably high level of turnover.
The portfolio is benchmarked against the FT/S&P Europe index. Risk is monitored on a regular basis at both a sector and stock level. At an individual stock level, the position will rarely be more than 3% overweight the index. This explains the relatively low ASD
Greenhoff said: "I am continually looking for investment ideas to outperform the index. I don't stick to just growth or value investing. My investment style involves both."
The reasonably high turnover in the portfolio has enabled strong performance of the fund to be achieved with a low risk profile relative to its peer group.
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