veteran fund manager bill mott's income fund posts returns of 45.4% over the three-year period to 12 december 2001
Bill Mott believes that many fund managers pay far too much attention to relative performance.
He does not monitor tracking error, saying that benchmarking against an index showing poor returns is pointless and not what active managers should be paid to do. He is therefore happy to take big positions in sectors of the market that he perceives will outperform.
Mott's funds ' the Income and the Monthly Income ' are both Micropal five-star rated and have a Standard & Poor's AA rating. The Credit Suisse Income fund has returned 2.1% on a bid-to-bid basis in the three months to 12 December 2001 against a UK equity income sector average of 1% and 45.4% for the three years to that date against an average of 6%.
Mott has been at Credit Suisse for more than 25 years and, he said, his time in the industry has given him a broader perspective than younger managers.
He said that the investment knowledge he has gathered has enabled him to combine a bottom-up, stockpicking approach with an ability to pick up themes that are likely to affect investment performance on a macro level.
He said that after a period where themes became less important, they are again key to his investment approach. Because there will be only a weak global recovery, Mott believes defensive stocks with highly-visible earnings will help to make income funds the best asset class.
How important is the experience you have picked up in the fund management business?
I think a lot of fund managers now are relatively specialist in one particular aspect of investment. Coming in as an integrated broker, I had experience of different areas. Bonds, equities, research and sales, as well as fund management. I'd like to think that during my career I've had a broader education in the different types of investment than younger fund managers are able to get in the current City environment.
The City has changed from creating generalist investment professionals to specialists. It is more difficult to get that broad investment education now.
How is this experience reflected in your investment approach?
This broader education has enabled me to marry a bottom-up stockpicking approach to a top-down thematic one. So my overall style is one of a thematic investor. I try to spot key investment themes early and align the portfolio I manage so they are swimming down-stream of that major investment theme. Of course, I try to articulate these themes by trying to buy the best stocks within the theme.
So how does this view tie in with your recent argument that the theme had become much less important?
I think we had a brief period when themes were less important over the past three or four months. I think that long term the global economy is going to be suffering from an anaemic recovery and therefore defensive high visibility earning stocks are going to outperform. I therefore think income funds will be the best asset class.
So you are not as confident about the UK market as many commentators who appear to be quite bullish about its likely performance this year?
There is a chance that we will get a spike-up in the economy over the next few months, as the first green shoots of recovery appear. But, on the whole, I think that the long-term returns from UK equities are going to be much lower than they have been in the past. You therefore need to be appropriately defensive in your investment stance.
So what do you think the market is set to look like for the next few years?
I think a 5% annual return from the market is now likely to be the norm, rather than the 8% or 9% we got used to in the 1980s and 1990s. They might be volatile and we might get a big spike up, as the recovery comes through but in the medium term returns are going to be much lower.
Can you give me some examples of how your thematic approach to investment works?
The two biggest overweight sectors in my portfolios are food manufacturing and building materials. The reason food manufacturers have been such a poor investment to make in the past 25 years is because the whole of their customer base has been consolidated and the power has been exclusively with the food retailers.
I think that the industry has now reached maturity and, in order to make extra returns, the food retailers will have high-low policies where basic products will go out very cheaply, but there will be increasing shelf space allocated to higher value-added products and more convenience goods.
I think that food manufacturers should participate in that, and so I believe that the outlook for food manufacturing looks better than the historic returns it has been able to deliver. This is a theme that we have in the portfolios.
We believe that companies such as Dairycrest and Northern Foods are trading at big discounts to the market and they have been performing very well recently.
Similarly, we believe building materials and construction companies are undervalued. In the past 25 years public spending in the UK and overseas has been neglected.
In the UK, there is going to be a massive crank-up in public spend and that will involve an element of construction and building materials. We think that the security and strength of the earnings are going to be much greater than their ratings would indicate relative to the market.
What kind of time horizon do you adopt when looking at when to buy and sell stocks?
We use an indefinite timescale. We maintain our stance while we think circumstances warrant it. I have no view of where we need to change our stance. That could be one year, three years, five years or 10 years.
How do you control risk, do you use tracking error?
We make no use of tracking error. We've got 100 stocks in the income fund and 80 stocks in the monthly income, so the absolute risk in the funds portfolio is relatively low because of the spread of stocks. We are willing to take very big benchmark risks. For example, at the moment we have nothing in technology or telecoms, where we perceive a secular over-capacity and therefore long term stock market under-performance. But in food manufacturers we are something like six times market-weighted.
We take big positions in areas of the market we like ' although, at a stock-specific level, risks are pretty low. The risk against the index is high but I'm a great believer that Government compliance, the regulator and many institutional fund managers attach far too much importance to relative or benchmark risk and not enough to absolute risk. I think relative risk is nonsense.
People can't live by relative return. If the market went down by 30% and I deliver 29%, the punters are not going to be very happy with me. Why pay an active fee to a manager who is going to cloak the index and have a small tracking error.
The top holding in the income fund is Dairycrest, with a holding of 3.7%. But in terms of the food manufacturing sector as a whole we have about 10.5% of the portfolio. Compare that with the index where it constitutes only about 2% of the index and that is mainly Cadburys and Unilever.
To what extent does your team play a part in your decision-making process?
Basically, I am the manager of the two income funds and you are getting my investment expertise in the running of those funds under the Credit Suisse umbrella. It is not process driven. You're basically getting my personal investment views. You are getting Bill Mott as a fund manager. You have got the comfort that, if I go under a bus, Credit Suisse will be able to hire another competent person.
What is the most important source of information to you?
The single biggest influence on my outperformance has been to make judgements on the future landscape or direction of the economy where the market is not pricing that in. I try to observe how the domestic and global economies are run and try to not listen to market noise, I try not to make decisions contemporary to market news and to take detached long term views.
Managing director of Credit Suisse Asset Management, where he is head of UK Equities.
Mott joined Buckmaster & Moore in 1977(later bought by Credit Suisse), becoming a partner in 1983. As UK investment director, he is responsible for the creation and co-ordination of investment strategy and the running of all Credit Suisse UK unit trusts.
Prior to joining the Credit Suisse Group, Mott worked for a brief period at National Westminster Bank, before moving to Chase Manhattan Bank, where he trained as a company analyst.
Mott received his First Class Honours degree in Chemistry and a PhD in Quantum Physics from the University of London.
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