James phillipps compares the two most recent managers of the credit suisse transatlantic fund
The growth bias of James Abate's and Susan Everly's respective funds has seen the pair underperform the S&P 500 Index over the last 19 months.
While both have performed more or less in line within their respective peer groups, the value bias of the market over the period has naturally hit both portfolios' numbers.
Abate has run Gam Star American Focus from launch on 24 September 2001. From 1 October, the earliest fund price date available, and 28 July 2003, the portfolio has returned -9.26% in sterling terms compared to the S&P 500's dollar terms growth of -1.16%, according to Standard & Poor's. Over the same period, Credit Suisse TransAtlantic, managed by Everly, has delivered -14.55% on a sterling basis.
Abate managed Credit Suisse TransAtlantic from May 1995- April 2000 before leaving the group and later moving to Gam. He and Everly worked together for two years between 1998-2000 on the fund with Everly taking the reins upon Abate's departure.
While both funds run with concentrated portfolios, Abate typically holds 30-40 stocks and Everly around 50, the Gam manager having more freedom in terms of sector and stock allocation than his former colleague. Abate's aggressive approach to stockpicking has led to high turnover and double weightings in sectors, such as technology, over various points in the fund's lifetime.
TransAtlantic's positioning as a more core holding, albeit at the punchier end of the spectrum, naturally leads to a more modest tracking error.
Both managers are rated by both Forsyth-OBSR and S&P, although the two agencies have taken quite different views in their assessments.
Abate's fund has an AAA rating from S&P compared to an AA from Forsyth-OBSR, while Everly has a AA from S&P and an A from Forsyth-OBSR.
Dean Cheeseman, head of research at Forsyth-OBSR, said both managers are highly competent and worked well as a unit. 'It would appear Abate is a little more adventurous. Everly came from a fixed interest background and appears more cautious. The assumption is she reined him in a bit, which seemed to work well,' Cheeseman said.
'Both have retained their growth biases and against an appropriate benchmark are doing a perfectly acceptable job. The Gam fund is slightly more high-octane than TransAtlantic and so in a volatile market Abate will have periods when the fund performs very well and conversely periods when it underperforms.'
His main concerns regarding the Credit Suisse portfolio, following Abate's departure, centred upon whether Everly could rebuild the team in a timely fashion. Meg Matthews joining Credit Suisse following a corporate merger allayed many of these concerns, however, and Cheeseman said the team once again functions well as a unit.
Everly said the main reason for the fund's recent underperformance of the index was a holding in AOL Time Warner, which halved in value over the course of 2002.
'Without that stock we would have done much better. It cost us all of our performance and then some. The rest of the portfolio performed well,' she said.
While the stock looked attractive on valuation and business metric terms, the more qualitative issues of merging such large companies with different corporate cultures led to a heavy fall in its share price, according to Everly.
Both Everly and Abate are tentatively optimistic the US market is recovering but have reined in their funds' beta.
Abate's portfolio had a 31% weighting in information technology in the fourth quarter last year, but this has been almost halved on the back of his concerns that weak corporate expenditure is unlikely to significantly improve in the foreseeable future.
Similarly, Everly points to ongoing overcapacity in the US market and notes companies are beginning to postpone proposed spending programmes in order to be able to meet earnings expectations in the second half of the year.
'We are starting to see some signs things are improving, but valuations have already priced in a glorious second half of the year.' Everly said.
'The only way the economy will pick up is if companies start spending again. In order for that to happen, businesses need to have stronger cashflow.'
Moreover, she notes, even those companies enjoying strengthening cashflows are using this capital to deleverage their balance sheets and plug funding deficits in their pension funds rather than buy new IT hardware, for example.
Over 300 of the S&P 500 companies face a combined pension fund deficit in excess of $200bn. Although last year companies poured over $45bn into pensions, this must at least be matched over the next few years for the issue to be resolved, according to Everly.
Other structural problems include the lack of pent-up consumer demand, Abate said. While the Fed's interest rate cutting programme has kept consumer spending buoyant on the back of widespread mortgage refinancing, the lack of pent-up demand will dull the pace of recovery, he predicted.
That said, companies that do deliver earnings above expectations have been sharply re-rated by the market, Everly said.
'With the current volatility in the market, undervalued companies are being recognised very quickly and may have a 30% run in a very short time period so we have to be much faster trimming our holdings then revisiting it later when the price has pulled back,' she said.
This has lifted the fund's turnover to between 100%-120% over the last two years and Everly expects a similar figure this year.
Many of the top performing stocks in the post-war rally have been lower quality, more indebted stocks and this has hit the portfolio's relative performance of late, as the fund's positioning as a core holding leads her to typically avoid more risky, volatile stocks.
While both Abate and Everly hold similar views on the current state of the economy, the two managers' positioning on the market-cap spectrum is one noticeable difference between the two portfolios.
Abate's large-cap bias, has become more pronounced over the last few months.
'The current market environment has seen a relative change in leadership. High quality companies are starting to outperform. In the fund, emphasis has been placed across cyclical and more stable sectors, with an overriding emphasis on leadership, size and dividend yield,' Abate said.
While Everly has similarly been targeting market leaders such as Microsoft and Gillette, her weighted average market cap exposure is below average, although she stresses this is a by-product of bottom-up stockpicking rather than a deliberate targeting of second-tier blue chips.
'Our weighted market cap average is around $78bn compared to the S&P 500's $88bn and we have found more opportunities in this lower range in the last couple of years,' she noted.
head to head
Just how true are a product providers claims when a star fund manager departs? Whenever a leading fund manager moves on, the previous employer promises investors the portfolio will continue to be run to the same high standard. In many cases, they promise the investment style of the successor manager will be similar, if not better. When the former manager re-emerges, it is not a given that their previous success will be repeated, although their new employers are publicly confident it will.
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