£64m Fund heads Uk all companies sector one year after its launch with 8.15% return against all companies average of -20.25%
The impressive performance of the Gartmore UK Focus fund since its launch just over a year ago is testimony to both the concentrated investment approach, and the ability of the fund managers Ashley Willing and Simon King.
The fund celebrated its first- year milestone last week from the heights of a first-place ranking in 287 funds in the UK All Companies sector. After charges, the fund made a positive return of 8.15%, while the average loss in the sector was -20.25%.
The managers say the £64m fund features an extreme level of active trading ” it is not unusual to sell a stock and buy it back five minutes later. The portfolio aims to hold between 25 and 30 holdings, although now holds 33. This is due to a lack of strong conviction over many stocks, says Willing, who found time to answer Investment Week's questions.
How is the portfolio constructed?
The portfolio is divided into two distinct areas, which I classify as strategic and tactical holdings. Strategic ideas are the long-term winners, and the decision to hold these types of companies generally flows from fundamental research undertaken by Gartmore's team of analysts.
These are stocks that we expect will outperform market expectations and produce good returns over the next year or two, so they are the long-term holdings in the portfolio and are not so actively traded, although we will buy and sell if we consider there are opportunities.
Alongside the strategic holdings are the tactical holdings, which are the shorter-term positions in the portfolio. The tactical positions can relate to any type of stock, even if we think it is a terrible company, provided we expect there is room for the share price to rise.
What are examples of tactical and strategic stocks?
An example of a tactical hold- ing is the hotel chain Millennium Copthorne. Forecasts have been severely downgraded and there is the chance of some positive upside. This company has been left behind in the rally of other stocks in the sector, so we expect there is room for it to catch up.
Compass Group, the contract caterer, is an example of a strategic holding. Even through difficult economic times, this company has continued to grow sales strongly and it has consolidated its market leading position. It is a very good quality business and that shines through.
We aim to have 50% of the portfolio invested in tactical stocks and 50% in strategic stocks. However, in reality, market conditions dictate that the proportion of one will always be higher than the other. At present there is quite an even weighting between the two types of holding.
What percentage turnover do you expect to have within a year?
The fund turns over in total once a month, so that would equal turnover of 1,200% a year. The turnover is heightened in numbers because each holding in the portfolio represents around 3% of the fund.
So if we buy and sell five stocks, we have a 15% turnover already. In a more diversified portfolio, if the manager bought and sold five stocks, because they have much smaller unit sizes, the turnover would be much lower, but the number of stocks about the same.
The shortest time I have ever held a stock for is five minutes. This happens quite often. We have to be quick to react if something happens. For example if there is a profit warning and we sell the stock, and then it falls a further 20%, then it could be worth buying it straight back.
Do you have any risk constraints in this portfolio?
There are no formal constraints, however there is an element of common sense in relation to the big four sectors in the All Share ' oils, telecoms, banks and pharmaceuticals.
These four sectors represent 50% of the market and are too big to ignore. We rarely tend to be less than half weighted in these sectors. The chances are that if you are negative but half-weighted in these sectors, and you are right, then you do very well. There is no point being more negative than that as if you are wrong, the results can be disastrous. What I have noticed with several concentrated and high performance portfolios is that quite often their undoing is through being too underweight in the big four sectors.
If the managers think there are better ideas elsewhere and don't own banks and oil, and they rally, then they find themselves in trouble and performance is killed because of this.
Within these sectors we will take big bets on the stocks we like and don't like. For example, within the banking sector, we don't own HSBC, but we do own the Royal Bank of Scotland.
Each holding in the Gartmore UK Focus fund is relatively even and will represent a sizeable 3% of the portfolio.
Do you ignore macro economic factors?
My skills do not lie in calling whether a market is going to go up or down, so I try to keep things as simple as possible and capitalise on my talent, which I believe is stock picking. The fund is therefore built very much from a bottom up basis.
How do your sell disciplines work?
Firm sell disciplines dictate that if a stock falls by more than 10% it will be sold. This is an automatic discipline that cannot be changed.
We also set price targets for selling once a share price increases by a certain level but this is looked at on a stock-by-stock basis and once that target is met, we will review the company to determine whether we think it still has further upside.
If we believe there is strong potential for the share price to continue rising, then we may continue to hold it to capture those gains.
However, because each stock represents quite a large slice of the portfolio, even small gains have a big impact on the fund. For example, with large individual stock positions of around 3%, if a single stock goes up by 10%, the fund has made a 30 basis point return.
The first 10% rise will always be easier than the second 10% gain, so we are more likely to sell it than not.
What is an example of a recent stock purchase?
We recently bought a stake in BT, the restructuring telecoms company. I believe this company has further scope for cost-cutting, having recently announced it would cut 14,000 jobs. I also expect recent management changes will lead to better performance.
How do Simon King and yourself work together?
We form the UK high performance team and also run UK long/short hedge funds, includ- ing the AlphaGen Avior fund.
My expertise is in large companies while King specialises in smaller caps, so our skills are highly complementary. We also draw on the resources of Gartmore's extensive UK research team. Because our portfolios are so highly traded, we have strict disciplines that at least one of us is at their desks at all times, from 7am until the market closes in the afternoon.
Are you positive for the year ahead?
Although I don't necessarily expect I will deliver returns of almost 30% ahead of the market, I do expect to be making money. I still expect that Britain's economic growth will slow in 2002 as fears of rising unemployment prompts cutbacks in household spending.
However, I expect growth to pick up toward the end of the year. This strong economic backdrop and the prospect of a pick-up in corporate profits growth in 2003 should boost stock market interest.
Our aggressive strategy should enable us to exploit market volatility.
l Gartmore UK Focus is not the only aggressively managed fund that has achieved strong performance since its launch.
A number of such funds have been launched over the past 18 months, typically holding between 25 and 35 stocks. They offer potentially higher returns with greater levels of tracking error, high turnover, but also increased downside risk.
BWD Rensburg, for example, is ranked first of 298 funds in the UK All companies sector since it was launched in late September 2001 to 28 January, 2002.
Invesco Perpetual UK Aggressive is ranked second out of 293 funds since its launch in late July 2001 to 28 January. Royal & SunAlliance UK Prime is ranked 15 of 228 funds since its launch at the start of May 2001.
These funds have also outperformed over most discrete monthly periods. The Gartmore UK Focus fund outperformed the sector average six of the 12 months since its launch. BWD Rensburg Aggressive Growth outperformed in three of the four months since its inception, Invesco Perpetual UK Focus UK Aggressive, four of seven and R&SA UK Prime six of nine.
FUND MANAGER: Ashley Willing
Gartmore in 1994 as an investment analyst. He took responsibility in 1997 for managing a number of UK pension funds.
From 1999 he was responsible for running the pooled and NatWest Life funds, as well as being a member of the UK retail team.
He has recently relinquished his institutional responsibilities to concentrate fully on hedge fund and high performance retails funds.
Willing graduated from Loughborough University in 1994 with an Honours degree in Economics with Politics.
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