Portfolio to have 4-5% index tracking error to control risk, says Ian Brady
The Schroders US equity retail fund, due to begin investing in June, is to have a tracking error of around 4-5%, according to fund director Ian Brady.
As first reported in Investment Week, the fund will invest in companies with good relative value, although the team is flexible in the style bets it takes depending on the market, Brady said. The fund will feature a more aggressive performance target, of index plus 2%, than the institutional fund on which the retail portfolio is based. The institutional fund aims for the index plus 1%, according to Robin Stoakley, executive director sales and client services at Schroders.
Brady, along with the named fund manager Ian Cooke, is responsible for sector allocation and stock selection. The two, who worked together for six years at Legal & General before Brady moved over to Perpetual, will be working closely together on the new fund.
Cooke and Brady are supported by a team of sector analysts in New York, junior fund managers, and Schroders' own strategy unit.
Brady said: 'Our initial step will be to decide where we are in the market cycle in order to anticipate our best chances of where to make money. We will get this from a variety of sources including the Wall Street economists, our own research team and strategy unit.'
He believes in combining the macroeconomic factors along with a stockpicking approach. 'It is very important for us to visit companies and get a feel for the management and company structure,' he said.
After Brady has determined where he is in the investment cycle, he will then look at the fundamentals to take advantage of any particular trends. He added: 'It is not simply a matter of identifying the trends as we need them in order to get specific stock bets right.'
To control risk, he will maintain a tracking error of 4-5% rather than specify an ideal number of holdings for the portfolio. Since taking over the institutional version last month, Brady has moved the portfolio from 60 positions to 90 and while the retail is likely to have less at launch, he is aiming to remain flexible on the number of stocks he holds.
He said: 'The fund will predominantly hold large and mid caps but will seek to have some exposure to smaller companies. We make sure there is a certain percentage of risk in the top five to 10 bets and compare where we are against sector and style. A third of the risk will be spread across 10 or so names in order to limit the risk.
'We will have formal meetings once a week but the aim is to chat on a daily basis. We want to try to minimise blow ups and catch early trends.'
Brady will be looking for companies with good relative value that have signs of stabilisation. He highlights the fact that the team will be flexible in terms of style bets depending on the markets.
While Brady is currently positive on consumer staples, he said he won't be buying wholesale companies such as Colegate. He added that there are profits to be made in oil services as there is a strong demand over in the US and believes there are still some genuine growth opportunities in pharmaceuticals.
Within technology, there are some positive sub-sectors but he remains cautious. Brady believes there is the best chance of an upturn in PCs and servers but the last to recover will be telecoms equipment.
Schroders believes the US is an important sector in which to have a retail fund. Stoakley said: 'Between 10-11% of advisers' business goes into the US sector. It is a core non-cyclical sector as, regardless of the shape of the market, money is consistently invested in the US.'
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