By Mohamed Ali Bernat The Phillips & Drew managed pension fund achieved its top-ranked performance ...
By Mohamed Ali Bernat
The Phillips & Drew managed pension fund achieved its top-ranked performance for 2000 from its weighting in defensives, according to Hugh Sergeant, head of UK equities at Phillips & Drew.
The fund was ranked first of 67 funds in the Caps Mixed with Property sector, which is viewed as a barometer of pension fund performance, after returning 7.1% for the year against a median return of -3.8%.
The performance was almost the complete reverse of results in 1999, which saw P&D record below-average returns after missing out on the technology bubble late in the year.
UK equities account for around 50% of the managed fund and Sergeant said the fund had performed well in 2000 because the team's investment policy had come right, helping it to achieve the right balance between equities, bonds and cash.
Sergeant added that the fund's lack of exposure to technology stocks was the reason behind its poor performance in 1999 and the upturn experienced during the last nine months of 2000.
He said: "We are very much fundamentals investors. We buy equities we think are at a discount to our valuation model.
"I would describe the fourth quarter of 1999 as being typified by the stock market putting stories ahead of substance, particularly with technology stocks, which helped create a bubble."
Sergeant said stocks, such as UK beverages, tobacco stocks and food retailers, were the kind of defensives the fund chose to be overweight in because the investment team thought them extremely undervalued.
He added: "You also had the Vodafone effect, where it became such a large stock that fund managers were selling off others indiscriminately to increase their weighting. Defensives were an obvious casualty of that trend."
Sergeant said he attributes two thirds of the fund's performance to stock selection and one third to asset allocation.
As well as doing well out of defensives as investors grew concerned about the direction of markets, the fund benefited from a number of takeovers involving companies such as Thames and Hepworth.
The fund also gained from a higher level of liquidity than the average investment manager, according to Sergeant, who added the team felt equity markets were too expensive worldwide.
Sergeant said: "We do not have a long-term bias towards defensives. Our purchase of defensives was price-led and a company like Diageo, which is a global leader in its industry and capable of decent growth over the long term, was trading at a P/E that was at a 40% to 50% discount to our internal valuation when we bought it."
Sergeant added that he is still broadly cautious on equity markets, with stock selection vital in the UK and US markets in particular. Sergeant said he expects to see quite a lot of corporate activity in the next 12 months but added he believes the US will suffer a hard landing and this means the fund will be cautious on US equities.
"We did have a very good year in 2000, especially when compared to the previous year, but we are certainly now happy with our medium and long term performance," he said.
Cautious, Balanced & Dynamic Growth
Cowardly, boring or sensible
Latest news and analysis
‘Most significant’ upgrade since launch
Changes happening over coming months