By Robert Stock Derek Lygo, manager of the Dresdner RCM UK Mid Cap Trust, hit the news in September...
By Robert Stock
Derek Lygo, manager of the Dresdner RCM UK Mid Cap Trust, hit the news in September when he took over as named manager on the UK Growth Trust after the departure of Justin Seager to Jupiter.
Lygo, who has been an institutional UK balanced fund manager for 16 years, began running the UK Mid Cap Trust in 1997, growing the fund from £12m to more than £185m.
The UK Mid Cap Trust achieved offer to bid returns of 54.5% and 142.2% over the 12 months and three years to 20 September according to Standard & Poor's. It is ranked of 7 of 302 funds and 5 out of 231 funds in the UK All Companies sector over that time period, while the UK Growth Trust is ranked 19 and 10 respectively.
Lygo discusses his ability to run both the Mid-cap and UK Growth funds.
How do you characterise the investment style used in both funds?
They are bottom-up stock pickers funds with established risk perimeters on stocks and sectors using fundamental research as our primary tool for stock selection.
How do you approach the control of risk?
The mid cap trust is largely restricted of the stocks that form the mid 250 index ex-investment trusts. The maximum stock position is 5%. There are no official sector limitations. The largest exposure is in information technology which is around 32% of the trust. The index weighting is 8.8%.
The mid cap has slightly more holdings than the UK Growth because it is a much riskier fund.
That diversifies stock risk and aids liquidity. There's around 90 at the moment. Ideally I'd like to see slightly fewer. In the UK Growth Trust there are around 70 and will remain so.
For risk management we use both Barra and Athema which are computer based models for portfolio modeling to tell us about the risk profile. We can do 'what if' analysis for different scenarios. If we want to increase or decrease the beta volatility or tracking error.
Are you able to give both funds the attention that you would like?
I have been a mainstream fund manager for 16 years. The UK Growth Trust invests in a similar manner to the institutional mandates that I have been running for all that time. It is just a continuation of what I have been doing.
The good news is I will be relinquishing a lot of my institutional mandates to concentrate more heavily on these two UK retail funds so I envisage being able to spend more time on them than I have been able to do in the past. This is dependent on hand over of clients which is obviously on a case by case basis, but I have already handed over the largest fund so the process is underway.
Do the skills for running mid cap and large cap funds differ greatly? Does your new role take you into uncharted territory?
Not really. I've been running mainstream UK equity funds for a long time and I've always been an investor concentrating in the top 350 stocks of the All Share Index.
What I have never been is a small cap fund manager as some sections of the media have suggested.
Looking at the most exciting growth areas in the market I've tended to look naturally at around £300m or £400m market cap and I have found a lot of companies that can double and double again by looking in this size band.
Is large cap management less hands on than mid cap management?
No. The difference is in the shape of the index itself. There are dominating sectors within the All-Share Index. They are pharmaceuticals, oils, telecommunications and banks which can account for around half the market so you have to have a view on these sectors.
As a specialist mid-cap manager banks are non-existent, there are no large oil companies and you have only got a small range of biotechnology companies and pharmaceuticals and there are no really large or interesting telecommunications companies.
When you are running a mandate across the market as a whole you have to start from these big sectors.
The limits are more strict with the UK growth trust than they are for the mid cap. The UK Growth trust has sector limits of 5% absolute over or under the neutral position.
When you take over a fund from another manager, how long does it take to make it yours?
No time at all. Justin and I sat next to each other for the best part of five years. We pooled all our investment ideas for the bulk of the assets we run.
You have to remember that for both Justin and myself the majority of the money we have been running is not related to these two unit trusts. We have a policy of zero dispersion for our institutional accounts.
We invest in the same stocks so the pooling of ideas means we had joint access to all the companies that we were following and over the years we have developed a style which worked well for us as a team.
All the stocks Justin held in the growth trust were familiar to me already and I also agree with the vast majority of the stocks that he had in the fund.
There is only one stock that I have sold since he left. I have just walked into it and carried on where he left off.
Given your retail management history, is it fair to assume the mid cap component of the UK Growth Trust will go up?
Looking at interesting growth stocks outside the mainstream, Justin was able to invest in small cap stocks, which I know well and will continue to hold. There is no urgency to put in mid cap stocks to achieve the same levels of growth. I'm very happy with the representation of mid cap stocks in the portfolio.
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