bob morris has reduced the cash weighting on HSBC's growth and income fund in favour of greater equity exposure
HSBC's Bob Morris was put in the hot seat as manager of the £421m UK Growth and Income fund following Tim Russell's departure to Cazenove in September. Morris, whose previous main responsibility was managing the £112m Household Names fund, is confident he can continue to deliver good performance.
HSBC Household Names was managed in much the same way as HSBC UK Growth & Income during Russell's tenure but Morris held a low profile among intermediaries as the fund was marketed through the bank's branch network.
Morris continues to run the Household Names fund and has also taken on the £81m UK Growth portfolio, formerly run by Julie Dean, who was part of the five-strong group that moved to Cazenove last year. His role on the UK Growth fund is a temporary arrangement as a replacement is being sought.
Despite Morris's previous low profile, his record with HSBC Household names is impressive. Over the year leading up to Russell's departure in September, Household Names, under Morris's management, outperformed UK Growth & Income. In the 12 months to 16 September, Household Names was ranked 19 out of 274 funds, falling 11.38% after charges. Over the same period, UK Growth & Income, under Russell's management, lost 15.38% offer to bid, while the UK All Companies sector lost 18.89%, according to figures provided by Standard & Poor's.
Is the UK Growth & Income fund now in the shape you want it?
Yes, I am happy with the position of the fund. In a sense, this fund was always shaped in a way that I would have wanted.
On the whole, there has been little change. I am of the view that if it ain't broke, don't fix it.
Funds here at HSBC are run with relatively similar benchmarks and with a reasonably consistent view.
Obviously, with higher-performance funds there is a greater degree of discretion. This discretion tends to be more in second-line stocks and those around the edges, rather than having a significantly different view at the core of the fund.
Therefore, the core of the UK Growth & Income fund was very much in line with what I would have expected and is consistent with our overall approach.
Did you change many of the stocks around the edges?
I have sold out of some smaller stocks simply because I hold a slightly different view to Tim Russell on their outlook. There are probably three or four names still in the fund for which I have longer-term concerns. However, I have not sold out of these yet and am reasonably happy to run with them until they can be sold at a higher price.
Companies I have sold include Mayflower, MyTravel and BTG. There is also the issue of wanting to buy new stocks for UK Growth & Income but, in these situations, I am waiting for the prices to fall.
The changes I have made have been relatively modest but can have a big impact on performance over time.
There has also been a lot of turnover as we have had some redemptions with the change of fund manager. The level of redemptions is not being disclosed by HSBC.
What other changes have been made?
There are now about 90 stocks in UK Growth & Income. Russell tended to run slightly more holdings. I have an 80-90 range and he ran his portfolio with closer to 100.
No risk constraints have been altered. It is very much business as usual. The underlying process is not changing.
Do Household Names and UK Growth & Income now mirror each other?
Not exactly, although there is a lot more commonality than there was four months ago. They both have similar risk-reward objectives. There is at least 90% commonality. I suspect they would never be 100% identical but they will be very similar.
What is the main difference between Russell's investment style and the way you manage money?
He tended to use cash more aggressively in the fund, his argument being he would not buy equities if he thought they were not attractively valued.
I tend to take a slightly different view. I believe that with an equity fund, it is not my decision as to whether I should hold cash or not. I therefore manage my funds on a more fully invested basis.
Throughout the past 12 months, the Growth & Income fund has been up 15% in cash under Russell's management. The most cash Household Names would have held over the same period is 5%-6%. Otherwise, our differences are reasonably subtle. The reason I joined HSBC just over a year ago is because I believe in a reasonably pragmatic style. Russell is also pragmatic.
What themes are now running in the UK Growth & Income fund?
Themes present in the fund have been somewhat consistent over the past 12 months. There had been a mild pro-cyclical bias to the fund under Russell's management and this continues to be the case.
In a general sense, that has worked, despite the fact expectations throughout the year have disappointed in a macroeconomic sense. Examples of cyclical companies I have held throughout the year include IMI, Wolseley and Taylor Woodrow.
Generally speaking, these areas have performed better than most people would have expected throughout the year, particularly the UK consumer. This is largely because the housing market has remained more robust than most people thought it would.
Within the pro-cyclical bias, the fund has had less of a focus on the consumer over recent months. By the end of last year, we were selling down our consumer cyclicals, particularly retailers such as Signet and Carphone Warehouse. That has worked quite well. In a trading sense, we have been looking to buy back retailers in the short term.
This is because we are reasonably sanguine about the consumer in the UK this year. It is unlikely to be as good as it was last year but I do not believe, despite the media frenzy, the High Street is dead.
Certainly, the robust nature of some of these companies is already being demonstrated through their recent trading statements.
Meanwhile, I feel some of the more defensive holdings are somewhat overvalued.
My funds have been underweight in some of the defensive consumer areas of the market, perhaps too early, which has affected performance in the short term. These include things like food manufacturing and healthcare, about which we haven't really felt the case was strong enough to warrant the valuation.
Do you have a size bias?
There tends to be a bias towards mid caps. This is not a top-down view, it is simply that there tends to be more investment opportunities in the mid-cap arena than in large caps. They are less researched and that creates opportunities.
What do you look for in individual companies?
I look for companies that have good cashflow characteristics or for which I can see some improvement in cashflow returns.
This is always my starting point. It is really about understanding return characteristics of businesses. For example, if it is a recovery play, it may be that it has to shrink its capital base to improve returns. A company may be attractive on pure valuation even when the business is not particularly good, but there will still be a large returns anomaly.
Has taking on the new funds substantially increased your workload?
As there is a great degree of similarity between Household Names and UK Growth & Income, it is the holdings around the edges that can generate the most performance.
There will be a greater similarity between these, so although there is some more work, the amount is not significant as I continue to look at the same universe of stocks.
FUND MANAGER: Bob Morris
Bob Morris joined HSBC Asset Management in August 2001 as a
senior fund manager on the UK equities team.
He started his career with Swiss Life (UK), after studying at
University College, London. He then became head of UK equities at Lucas Pension Fund, now part of TRW.
Prior to joining HSBC, he was associate director of equities at SLC Asset Management, where he successfully managed the UK Growth unit trust.
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