Legg Mason Investments is changing the mandate of its European Growth fund to enable it to follow mo...
Legg Mason Investments is changing the mandate of its European Growth fund to enable it to follow more of a high risk/high reward strategy.
Fund manager Keiran Gallagher said the move follows chief executive Deepak Chowdhury's strategic review and will bring the mandate into line with the group's less rigidly run sister funds.
The £13.4m European Growth fund, run as a concentrated portfolio of 30-40 stocks, currently restricts stock bets to 5% either side of its MSCI Europe ex-UK benchmark and sector bets to 10%, while targeting a tracking error of 6%. Other funds in the stable, including Bill Miller's US Equity fund, have no such limitations and Gallagher is keen to take advantage of greater flexibility.
'We are discussing running higher risk/reward profile and taking advantage of the fund's size,' he said. 'We will probably ease the stock and sector restrictions, if not get rid of them, and possibly raise the tracking error to 7% or 8%.'
As part of this, Gallagher will look to add to his existing positions in Eastern Europe, which currently include stocks in Poland, Hungary, Czech Republic and Croatia held at the margins as a convergence play.
Gallagher is also looking to invest up to 3% of the fund in Russia as he believes there are strong opportunities, particularly in the banking and telecoms sectors.
Gallagher has just passed his first anniversary in charge of the fund after joining from Newton last year, as has his successor on the Newton Continental European fund he previously ran, Raj Shant.
Over the 12 months to 28 April, Legg Mason European Growth has posted a return of -28.7%, offer to bid, while Newton Continental European returned -24.2%. This compares to a sector average of -26.9%, on the same basis.
Shant said the European markets were led down by the technology, media and telecoms sectors in 2000-2001 but this malaise was more widespread last year.
As attention shifted away from these beleaguered sectors, both Shant and Gallagher were able to profit from telecom and technology restructuring stories by overweighting the sectors.
Shant also pursued something of a contrarian approach avoiding 'safe haven' sectors such as food retailers, which benefited the fund, while Gallagher boosted performance by taking profits and then underweighting the oil sector in the run-up to the Iraq war.
A key driver behind Shant's relative outperformance of the sector was missing corporate crises, such as Ahold, which delivered a total return of -78.28% over 12 months to 8 May.
Shant said he sold out of Ahold prior to its collapse on concerns about its practice of including profits from disposable properties in its operating profits.
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