Axa's Stuart Fowler believes defensive stocks are now fully valued
Stuart Fowler, head of UK equities at Axa Investment Managers, is bullish the current rally will continue until at least early next year and expects the FTSE to hit 6000 before the end of 2001.
He bases his optimism on a perceived change in market sentiment since 21 September. Government stimulus, the aggressive rate cuts seen of late, allied to the cost cutting exercises many companies are currently engaged in mean investors no longer have to hope that the economy may recover, he argued. Companies are cutting costs to ensure profit growth does resume.
Fowler has positioned his portfolio to be overweight in the mid and small cap arena, believing that it is only further down the capitalisation sale that it is possible to find growth opportunities at present. He expects to continue being underweight large caps, which he believes are fully valued, for the foreseeable future.
Fowler joined Axa in October 2000 and has personal responsibility for the UK Opportunities fund launched earlier this year, as well as assisting in the management of a number of other funds.
How would you define your investment style?
For me, in any investment the question that I'm trying to answer is 'what is this company worth?' If you're looking at a company that's been through a bad time, to find out what it is worth you have to understand the environment, both business and market. You have got to work out what the rest of the market thinks it is worth and then determine under what circumstances you think it could be worth something different. It forces you to think about quality issues and balance sheets. I know it's a bland answer, in that it doesn't capture issues such as growth or quality of management but answering the question of what a company is worth forces me to address all the other relevant questions.
Why do you think now is a good time to buy a special ops fund?
I'm not sure I would necessarily say that now is a better time to buy a focused fund than any other type of fund, to be totally honest. I think individuals must consider their own risk appetite. Concentrated portfolios such as the one I run will have higher volatility than a longer list fund.
The message I would give to investors is that I think there's a short-term rally to come and that it's unlikely people will have the opportunity to buy again at this kind of level. Therefore anybody who has reassessed their overall portfolio balance and believes they don't have enough in equities, should be looking to change that. The medium to long-term message for everyone should be that diversification is crucial.
I think if you were to ask why would a more concentrated portfolio be particularly appropriate now, it's because the big constituents of the market at the moment look pretty fully valued. The really undervalued stocks in our eyes are further down the capitalisation spectrum where you just get more bang for you buck, proportionately more than in the big names.
How do you go about ensuring diversity in a concentrated portfolio?
If you were to equally weight 40 stocks then you would of course have 2.5% in each. I am very benchmark aware so I do have larger holdings than that in the bigger names. We make sure we have good diversity by having a good sector spread. I do allow myself to be up to five absolute percentage points away from the index sector weight. In addition we use Barra and other quantitative tools to make sure that we have most of our risk in individual stock names rather than any particular sector bias.
What are the sector and stock risk constraints?
On a sector level, I might be five absolute percentage points away from a sector weight. On an individual stock I am allowed to be up to four absolute percentage points away from a stock weight, although I only use that for the biggest names we hold. For instance I have no Astra Zeneca, which is currently 3.1% of the index. But to make up for that I do have holdings in other pharmaceutical names such as Galen Holdings and Celltech.
I would tend to take the biggest stock positions on companies that I think have predictable profits and cashflows and therefore share prices. This is simply because I would never go 4% overweight on a Galen, a company which we believe could be a great investment opportunity, but its individual volatility could be too great.
Can you quantify the fund's objective?
The objective for this fund is to be upper decile over three years. History suggests that to achieve this you need to be 4% ahead of the index per annum, after costs. Of course that could change, but that's what history suggests. We take the view that most funds benchmark against the index because they recognise it's good competition. If you don't beat trackers over a reasonable period you're going to have difficulties. I know there are one or two of my direct competitors who don't bother looking at indices but most do.
How do you go about identifying opportunities?
We have a very active programme of company meetings which both fund managers and analysts attend. Very often it proves to be the final part of an investment idea we're working on. If we think we've found an opportunity off book work then very often the company meetings are a good way of confirming if the bookwork was reasonable. We also spend a huge amount of time looking for opportunities presented by market volatility. Stock prices are getting ever more volatile so it means that from time to time just by keeping a close eye on what's going on, you can play old favourites time and time again.
How do you control risk in that kind of environment?
As well as the sector and stock controls that I've already mentioned, I like to have a large number of relatively equally sized bets, rather than bunched bets. I have an aim to have an average position size against the index of 1.5%. You may say, 'hold on, 40 stocks takes you to 2.5%,' but by the time you have a bit of base load in some of the big names you'll find on average I have holdings around 1.5%. This helps to ensure a good diversification of active positions.
In addition we also use Barra and another quantitative tool called APT which monitors tracking error. I aim to have a tracking error of 6%, which is quite punchy. There are others I know that have a higher tracking error than this, but that's what I need to beat the performance hurdle we've set for this fund.
What themes are you following at the moment?
We try and avoid taking too many themes because it can often be quite misleading. It's easy to dream of themes and find they don't work out in practice. The message from the portfolio is that we find an awful lot of defensive stocks to be fully valued. We believe there is value to be found in companies that are more economically sensitive, so it's the share price relative to price target that leads us to have a very aggressive stance in the fund.
What were the immediate effects of 11 September on your portfolio?
We dealt very little immediately after the attacks. Experience suggests, and we've got a lot of grey hairs in the UK team here, that you should sit and wait for a clear development to occur after an event like that. You can have an immediate reaction, for example airlines are going to be hit, but the reality is you're dealing off incomplete information.
It's interesting that as a team we were relatively inactive until what proved to be the bottom and by that stage there were loads of attractive opportunities that we wanted to start taking advantage of. So we really didn't do a lot for about 10 days and then found there were lots of opportunities to rebalance the fund.
How important is the team process to your stock selection procedure?
Very important. I don't have a market monopoly on wisdom and we have certain individuals who follow particular sectors. If an analyst recommends a stock and I'm not sure, then I'm prepared to act on that as I respect my colleagues' judgement. These are high conviction funds and nine times out of 10 I want to be sure that I'm backing my own judgement as well but I have to recognise that there are parts of the market where others can read things better than me. Personally I'd always rather work in a team with a spread of views than on my own.
Joined Kleinwort Benson Investment Managers as a graduate trainee
Spells at Morgan Grenfell Investment Management and James Capel Fund Managers (later HSBC) before rejoining Kleinwort Benson (later Dresdner RCM) as head of UK and European equities
Key part of the highly successful Dresdner RCM UK team that started to break up two years ago.
Joined as head of strategy, multi asset, in June
Group income protection
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