Dresdner RCM UK growth and UK mid cap manager trevor green has carried over his investment style from credit suisse
Trevor Green has sold out of illiquid small-cap stocks in Dresdner RCM Global Investors' UK Growth fund, creating a greater mid-cap focus for the portfolio.
Green joined the firm in February after five years at Credit Suisse Asset Management, where he ran the UK Growth fund and some institutional portfolios.
At Dresdner, Green manages the £106m UK Growth and £52m UK Mid Cap funds, previously managed by Derek Lygo, who left the group to join First State last year. He also has responsibility for JOS Holdings and the British Portfolio Trust.
Were the funds significantly revamped upon your taking over their management?
Both funds were seriously underperforming when I took over. As a result, there was a lot of work to do in getting them into shape. There was about 25% turnover in the UK Growth fund and 40% in the Mid Cap.
Getting the funds to look how I wanted took quite a while, particularly the UK Growth fund, as there were a lot of small caps to dispose of, which created liquidity issues. For this reason, I am responsible for performance for the Mid Cap fund since the end of April and the UK Growth fund since the end of May.
There were some changes, not only to the underlying holdings but to the number of holdings, risk parameters and the way the funds are managed.
Was there a big cultural change in joining Dresdner?
I have left a big Swiss bank to join a big German bank, so coming here was more or less what I was used to. There was very little change.
What was the key factor that encouraged you to move?
I like the idea of dedicating all of my time to running retail funds and I feel Dresdner RCM provides an excellent platform.
Will you be managing money in much the same way as in your previous role?
I have brought the same investment process I used at Credit Suisse to Dresdner RCM. In addition, I have introduced my own risk parameters.
Essentially, my investment approach is growth orientated. It is based on bottom-up analysis and stock selection, which is working amid the current volatile stock market conditions. Essentially, I go out to meet companies and make decisions on their prospects going forward.
What valuation measures are you most comfortable with?
I am very much a believer in earnings momentum. I tend not to invest in firms that have disappointed in the past in anticipation there may be a turnaround.
This does not mean I avoid recovery situations altogether. A company's share price may simply be suffering because it is in an out of favour or unloved sector. In fact, using the market's mood swings, whether overly optimistic or pessimistic, is quite an advantage. I like to anticipate rather than react.
Dividends are important but not principally what I look for. I see them as important in that they are a key indicator, as a company's dividends indicate how positive it is on its own outlook.
Do you tend to favour certain sectors as a result of this growth bias?
One of the key things I need to do as a fund manager is define what I mean by growth. I define it as companies that generate cash above market average and reinvest back in their business.
This can occur across a range of sectors. People have to get out of their minds that growth means technology, media and telecoms companies.
Do you have ample research resources at Dresdner RCM?
There is a very strong team of UK analysts that research stocks by sector, which is part of a bigger global research resource.
In addition, we have proprietary research called Grassroots. This involves conducting our own primary research on market trends. For example, we might have people standing outside a new supermarket counting the number of shoppers if we are interested in that retailer.
The aim is to help us keep ahead of market trends. Around 50-60 company/industry-specific studies are carried out every month.
What are the main features of the UK Growth fund?
The Growth fund currently has around 60-70 stocks. Before I took over it had 85, so I have concentrated the portfolio somewhat. The fund is overweight mid-cap stocks, with 22% in this area compared to 12% in the index. It is 3% invested in small caps.
This is not so much about my view on mid-cap stocks as it is where I am finding the best growth opportunities. I believe in trying to catch growth stories early rather than when they arrive in the FTSE 100 Index.
There are relatively few small caps because I am trying to maintain liquidity and there are plenty of opportunities to be found among mid-cap stocks.
In terms of the main sectors, oil and gas and telecoms are overweight while banks and pharmaceuticals are underweight.
How do the risk controls in the UK Growth fund work?
The tracking error on the Growth fund is 4%. This tends to be controlled more at the sector than stock level.
With the four main sectors, ' banks, oils, pharmas and telecoms ' I will not take a bigger bet than 20% either side of the index weighting. This means that while I may be underweight some of the larger banks, it will be balanced by positions in other companies in the sector. I am currently underweight Far Eastern banks, for example, and hold no exposure to Standard Chartered.
As a risk control measure, I will have some exposure to all the larger companies in the index, representing more than 3%, even if negative. The largest stake in a mid-cap stock I will have in the UK Growth fund is 3%.
One of my most overweight stocks is Vodafone, for which the current valuation is compelling, although future expectations are still quite low. Ultimately, however, it has a strong brand and earnings potential.
What is an an example of a key large-cap stock?
ICAP is my largest overweight in both the UK Growth and Mid Cap portfolios. Macro uncertainty is good for this stock and trading and activity levels remain strong. It is the world's largest inter-dealer broker in the derivatives, securities and money markets.
Current volatility in world credit and interest rate markets is beneficial to this company. Meanwhile, it is a highly cash generative stock and the valuation is attractive, with a P/E of 13 times 2003 earnings. This is a good example of an undiscovered growth stock.
I also like Vodafone. It is very cheap relative to its growth prospects and the technological developments it has in the pipeline. I expect the re-rating to continue.
Are you comfortable running a mid-cap fund?
Yes, in fact one of the most appealing things about coming here was that I would be running a dedicated mid-cap fund.
My background at Capel Cure Myers was in smaller and mid-cap companies and that is also how my former Credit Suisse colleague Bill Mott made his name.
The reason I welcomed the idea of running a pure mid-cap fund is that there is no index to hide behind.
Unlike the FTSE 100, where you can take small views on the top 10 stocks and have half your assets invested, the mid-cap fund requires a lot more active decision making.
Is there a lot of commonality between the two funds?
All mid caps held in the Growth fund are also held in the Mid Cap fund.
What are the features of the Mid Cap fund?
There are 58 holdings at present but the general range is 60-70. The lower number is simply a reflection of the current opportunities. The target tracking error of the fund is 5.5%. Stock picking is essential as there is no real index to track.
I will typically not run stocks if they enter the FTSE 100 and will sell out of them within a few months if they do. About 4% of the fund is currently in the large-cap index but I am selling out of these stocks.
What is an example of an interesting company in this fund?
One of my most overweight bets is Egg. The online bank has been running successfully in the UK but has recently launched a French bank, which will be integral to its success.
I am currently commissioning a Grassroots study into consumer reaction to the French offering, the results of which should be ready soon. This is a classic example of the benefits of Grassroots.
Are you positive in your outlook for the UK stock market?
In terms of underlying drivers, I am concerned this is as good as it gets for the consumer. People have built up their personal debt levels and yearly comparisons are getting tougher.
The UK is in better shape than the US, however. For that reason, we tend to steer away from firms with high exposure to the US. For example, we do not own any Hanson or Taylor Woodrow. But you have to remember the UK stock market follows the US closely.
FUND MANAGER: Trevor Green
Green joined Dresdner RCM as director, UK and European equities in February 2002.
He has 11 years experience in investment management, starting his career at Capel Cure Myers and ultimately becoming a manager on its smaller companies fund.
Green became associate director for the UK equity team at Credit Suisse Asset Management in 1997, before being made a director in 2000.
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