over one year, norwich's UK equity fund returned 5.58%,while hendersons UK capital growth registered just 1.21%
Hendersons' Richard Prew and Morley's David Lis were colleagues at Norwich Union for almost three years, but now run competing UK equity funds.
Prew has managed the £105m Henderson UK Capital Growth fund since joining the group from Morley in February 2001, while Lis took over Prew's former portfolio, Norwich UK Equity, in November 2000. The Norwich fund is now £200m in size.
The managers have been head to head since Prew joined Hendersons. Over the period 1 February 2001 to 1 September 2003, Prew has delivered the best performance of the two, with his fund ranked 127 out of 253 funds and delivering returns of -30.18%, compared with the UK All Companies sector average of -28.33%, after charges.
Over the same period, Norwich UK Equity is ranked 171 in the sector and delivered returns of -32.77%.
Over 12 months, however, Lis has been the better performer out of the two.
Norwich UK Equity is ranked 118 out of 292 and delivered returns of 5.58% over the 12 months to 1 September, compared with the sector average of 5.56%.
Henderson UK Capital Growth has less impressive performance, being ranked 233 and returning 1.21%. The Henderson UK Capital Growth fund has a Forsyth OBSR AA rating, while the Norwich UK Equity fund is rated A by Standard & Poor's.
Both funds have similar objectives in that they intend to be low-risk core portfolio holdings. The Henderson UK Capital Growth fund invests mainly in bigger UK companies that are household names and Norwich UK Equity Fund is also predominantly large cap-oriented.
The Henderson UK Capital Growth fund typically holds 60-65 stocks. There will be a core of 30-40 FTSE 100 holdings, which will account for around 65% of the portfolio. The aim is for these to be the main drivers of performance.
A further 20%-30% will be invested in the mid-cap sector, generally comprising 15-20 established companies.
The remainder will be invested in what the manager describes as early stage and special situation stocks that display a higher risk and reward profile. Each position will typically comprise 0.5% of the assets at purchase and will be top-sliced when they reach 1%.
According to Forsyth OBSR, theme emphasis is a key part of Prew's top-down investment approach. Prew believes that no single style will work in all market conditions and therefore adopts a pragmatic strategy.
Company analysis focuses on the quality of earnings growth and valuation measures, including peer group relative valuations. Prew then applies a top down overlay, according to Forsyth. Within the Hendersons fund, core stock selection criteria include a company's pricing power, revenue growth and competitive advantage. Quality of management and customer ownership are also important.
Lis holds around 80% of his portfolio in FTSE 100 stocks, the remainder being mid caps. He runs a more concentrated portfolio than Prew, who currently holds 51 stocks.
The Norwich fund holds underweights or overweights of a maximum of 2% relative to the All-Share. At a sector level, a maximum of 5% is permitted.
Prew has much more flexibility in relation to risk constraints in his Hendersons fund. He can hold individual stock weightings of plus or minus 4% relative to the All-Share. The sector divergence can be plus or minus 10%.
'In reality, there are only minor differences between the way the fund is managed now, and when it was managed by Richard Prew. The main difference is I probably run a more concentrated portfolio now, than what it was before,' Lis said.
'The exposure to mid-caps is larger than it once was. Also, the fund used to hold small caps, but these have all but been eliminated.'
Lis is also a stockpicker but there is also a top-down overlay that influences portfolio construction. When researching stocks, he looks for quality of business model and whether the company has pricing power in the market it operates in.
'The quality of management and the health of the balance sheet and future prospects of the business are also very important, and we scrutinise these closely,' he said.
Currently, in terms of investment themes, Lis's portfolio is tilted toward cyclicals and there is a strong emphasis on the technology, media and telecoms sector. He is also overweight banks and insurance.
'We like Vodafone and mmo2 in particular amid the mobile stocks. We think the banks have been left behind in the recent market rally and we like the Asian banks, as well as Credit Suisse and HBos,' Lis added.
Key underweight positions include utilities and mining, while oil is a minor underweight in the Norwich UK Equity portfolio.
In the Hendersons fund, current key overweights include leisure and hotels, media, speciality finance, construction and building materials and transport. Meanwhile, Prew's key underweights are pharmaceuticals, beverages, food producers, utilities and food retail.
When the sector weightings of the two portfolios are compared with each other, it is immediately noticeable that both managers have their largest weightings in financials, making up 30.6% of Lis's portfolio and 36.9% of Prew's as of the end of July.
In July, Prew added Abbey National to his portfolio, as the business is cost cutting and restructuring, although not is such quantities that the stock made it into his top 10 holdings (see table opposite). Lis already held the stock, although it too was not among his top 10 (see table below).
Lis's second largest sector exposure is to non-cyclical consumer goods at 16.7% but Prew has just 7.6% here. Prew's second largest sector weighting is in cyclical services at 28.5%, while Lis has only 10.6% exposure to this sector. Both men have similar weightings to resources, basic industries, information technology and cyclical consumer goods (see pie charts).
Lis also runs the Morley UK Focus fund, a concentrated 30-stock portfolio, and the Norwich UK Growth fund, which holds 80-100 stocks and has a large small-cap component of a maximum of 25%.
Prew manages some £500m in assets. In addition to UK Capital Growth, he runs the UK Equity Long/Short fund, Pearl Equity Growth, NPI UK Growth Retail, Horizon UK Equity Fund and the NPI Pension fund satellite.
Lis works closely with Mervyn Douglas, who runs similar life assurance portfolios for Norwich Union. He can also draw on the resources of a team of 18 analysts. At Hendersons, Prew works with other UK managers Patrick Harrington and Mileen Rash, as well as analyst Ben Stanton.
The UK equity retail team is able to leverage all the mainstream investment processes and resources within Hendersons and in particular looks to liaise with the UK value, core, small-cap and European teams.
FUND MANAGER: David Lis
Joined Norwich Union in 1997.
Has worked as director of an investor relations consultancy, and a fund manager at Windsor Investment Management, a company he founded and ran.
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m