Uk equity growth fund has outperformed All companies sector in the seven years since michael barnard took charge
Michael Barnard, manager of Marlborough UK Equity Growth, has quietly steered the fund to top decile performance over every measurable time period, but without the fanfare enjoyed by many fund managers.
Management of the fund was contracted out to Barnard, proprietor of stockbrokers MD Barnard & Company, by Marlborough Fund Managers back in 1995. In the seven years since he took the helm, the fund has returned 210.34% versus a UK All Companies sector average of 37.10%, on a bid-to-bid basis. This was achieved with a beta of 0.81 versus a sector average of 0.99, ranking the fund top for risk-adjusted returns. In August, Investment Week reported Barnard had taken the cash weighting of the Equity Growth portfolio down from his typical double digit holding to just 2%, on the back of his optimistic outlook for the UK market.
Barnard took over management of the Marlborough UK Equity Income fund in June this year, cutting its holdings to 30 and selling and lightening some of the other positions he inherited. In the three months to 6 September, the fund has surged up the rankings to become third out of 90 funds, outperforming the UK Equity Income sector average by 7.71%.
What do you look for in a stock?
• look for growth in a company's earnings per share, preferably over a long period of time, and I like companies with stable and sustainable earnings.
• also look at the trend in its share price and have to be able to understand a company. That is why I tend to avoid stocks such as oil exploration or patent companies because it is very difficult to evaluate their potential.
I also try to avoid stocks using the Marconi approach: going for market share and sales at the expense of profits. Anyone can chase sales, the secret is not just selling something but selling it at a profit.
Looking back at UK Equity Growth's performance over the past few years, how important is market timing in comparison to pure stock selection?
• do not try and get market timing correct and I do not think anyone can keep getting their timing right unless they are lucky. It can sometimes be difficult to buy at the bottom because it can be hard to pick up big lines of stocks at the exact time you want them, so there are some managers who buy for recovery in two years time.
My approach tends to be looking at valuations. Providing I see good value in a stock, I am quite comfortable buying it. If stocks get to too high ratings, I will avoid them, even if they are the flavour of the month. I am not a momentum investor.
Given UK Growth's long-term track record, have you had many job or outsourcing offers from larger fund groups?
I• have been approached but I run MD Barnard & Co and Marlborough contracts out the management of the fund to me. I have been running MD Barnard & Co since 1988 and own 100% of it, so I am not going to run out and our unitholders can be pretty relaxed.
• have also just taken on the Marlborough UK Equity Income fund, which is a challenge.
Have you made a lot of changes to the income portfolio since inheriting it?
I have had a lot of restructuring to do, which adds to the expense, but I took it over at the start of June and it is now up to third place in the sector over three months and the yield is up to 4.2%.
I spent a lot of time looking at each of the holdings. The portfolio had a lot of low-yielding stocks when I took over. I have not done much selling in the income fund lately, though. I am pretty bullish with the market as a whole and I think the leaders will drive the rise.
Some of the low yielders, like RBS and Tesco, I like as stocks but don't think are suitable for the income fund. I won't sell them at prices I think are depressed when I am bullish on the market, though.
There were some convertibles, which gave a good return, but as with fixed-interest stocks, there was little room for capital appreciation. I sold them and bought Acorn Income, which has got some really good holdings. I rate Peter Webb highly and Acorn is yielding 11% and currently trading on a discount to asset value.
I will be adapting my style a bit, as the average yield on the growth fund is just 1%. The income fund is more difficult to manage because you cannot go for stocks without a yield, but it is a much smaller fund so you can hold smaller stocks.
How have you structured the income fund?
I plan to have some core holdings, which will tend to be FTSE 100 stocks, for liquidity purposes. The fund was quite focused a month ago but is less so now.
Generally there is a higher level of risk associated with high-yielding stocks, so I would rather have a large list of them in case anything goes wrong. It is also more difficult to sell shares in smaller companies, especially if anything goes wrong.
Are there difficulties managing a small fund?
It is very difficult when you start with a £1.8m fund and then within a couple of months it is £3.5m because all your weightings get changed. That said, a £40,000 micro-cap holding in a £3.5m fund will have some effect. For the UK Growth fund, it is difficult to buy more than £40,000's worth in a small stock and, if you do, it is difficult to sell if something goes wrong.
The fund is so small you can get good performance from it and even with Equity Growth at £24m, it is still pretty flexible.
We initially sold a lot of small holdings and started again with fewer, but much larger, holdings. Acorn Income is the largest holding in the UK Equity Income fund at 8.59%, but is already diversified with 50 or so stocks.
It is not often I have more than 5% of the fund in one company. In the income fund, the larger holdings will be diluted over time. In UK Equity Growth, Royal Bank of Scotland is the only holding above 5%.
Have you had to adapt your management style as the funds you have run have grown in size?
When I took on Equity Growth, it was a £700,000 fund and we are still getting good performance now it is £24m. I have been building up the number of holdings to keep my exposure to risk at a low level as the fund grows.
I don't want it to become a focused fund. On the basis of Anthony Bolton's performance, running a large fund is not necessarily a problem, but it certainly becomes more difficult.
You have displayed your optimism that the market will recover sooner rather than later by moving to a fully invested position. What is your current outlook?
Everyone seems to believe the market will reach a new high at some point. If you look at the index, it would take a 64% rise to get it back to where it was.
Over five years, that would be a good gain, especially with dividends on top. I think it is possible, and that is just tracker funds. With active management, the returns attainable versus cash should be very attractive.
FUND MANAGER: Michael Barnard
Barnard set up his own stockbroking firm, MD Barnard & Co in 1988, after the crash.
He took over management of Marlborough UK Equity Growth in 1995.
Marlborough handed him management of UK Equity Income in June 2002.
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