By Fiona Henderson As lead fund manager of the US Growth Fund at Britannic, Terry Ewing has had t...
By Fiona Henderson
As lead fund manager of the US Growth Fund at Britannic, Terry Ewing has had to see the portfolio through some torrid times, especially as of late.
He believes the US market has been through the worst and is in a phase of bottoming out. As a result, the portfolio has recently moved from being very defensively positioned to overweight technology, healthcare and financials.
Ewing's expertise in the healthcare area is reflected by his role as co-manager of Britannic's new Healthcare fund.
While favouring healthcare in the US portfolio and co-managing the sector fund itself, Ewing says he is careful to keep the two portfolios separate and runs them using different styles and processes.
How is your investment style for the US Growth fund different to the one on healthcare?
The Healthcare fund is less focused on macro-economics as healthcare is not cyclically exposed.
For the last 17-20 years most healthcare indices have shown gains, which demonstrates the durability of the sector. The reason healthcare is performing so well is that people are getting older and will always spend money on health.
As the US Growth fund is much less specialised than the healthcare fund we take much more of a top down view to the market.
Our team always has a firm view of the economy and the stage of the economic and profit cycle we are in.
We also place more of an emphasis on quantitative and qualitative analysis. Consistently choosing top performing stock does mean combining macro-economic data with very bottom up opinions, especially when trying to identify attractive stories with improving earnings.
Turning any unit trust into a top performer comes down to having 50% knowledge and 50% confidence. In other words, you can have all the information in the world but if you don't have the confidence of your convictions you will never see great returns.
Is there an overlap between the US fund and the healthcare fund?
There will be many stocks in the heathcare fund that are not featured in US Growth. It would be fair to say that if the US fund owns a healthcare stock then it will be in the Healthcare fund also. This is pretty much the same with any specialised fund as the US is an important indicator.
The only difference will be in the weighting.
How is the US team structured?
The team is very important and is made up of five members. Many funds split responsibility between macro sectors but ours is structured slightly differently. A broad sector will be divided between three or four people and each person will take responsibility for a sub sector. This also prevents any one person being overly bullish or bearish and allows for a better perspective.
What is your approach to investing?
The team is very flexible and active so can make changes to the fund as and when something happens. In addition, we will have a monthly strategy meeting where all ideas and aspects of the fund are pulled together.
A representative from the fixed interest team will come along to give a view on the bond market. We will then look at sectoral performances, the fundamentals of each sector and work through each holding in the fund.
Having looked at the US on a sectoral basis we will then compare this against more stock specific ideas. Occasionally, sector analysis does not marry up with bottom up analysis, for example a company may be fully valued or have management issues. The meeting allows us to tie together all ideas from every perspective, and come up with sector weightings.
The portfolio will have some core holdings in addition to some short to medium-term ones. With the shorter term holdings, we will set a target price at which point we will sell. However, if there is a fundamental change in the earnings picture, such as a healthcare stock having a new product approved, we would review the situation. The current environment is very much a stock pickers market.
What are your favoured US sectors at the moment?
There was a sell off in the market this year and through February the fund has been positioned very defensively. Since then, the S&P 500 has come back to very attractive levels, which has led us to review our weightings.
Our two favourite areas are healthcare and financials and we are overweight both sectors.
Financials are very interest rate sensitive, which makes these stocks very attractive as we expect further cuts soon. There are also fewer credit quality concerns. We like the credit card company, Capital One, as it is geared into the consumer cycle and has visible growth for the year.
Consumer credit quality should stabilise by the second half of the year as interest rates come down. The company was oversold in March as it was hard hit by consumer credit quality concerns.
Healthcare is our other preferred sector as it is has high earnings visibility and is less economically sensitive, which counterbalances the financial sector. During March, valuations came down considerably and we have now moved overweight the sector.
Pfizer is an example of a healthcare stock we like as it has the strongest earnings growth outlook in sector. This is in terms of revenue and earnings and unlike many peers has had little patent exposure this year.
What is your opinion of the tech sector?
We have moved technology from underweight to the market weight and potentially overweight. This has really been done on a valuation basis as the sell off in the market was bad news for technology, and this has been reflected in the prices.
Some technology companies look good, which is why we will be moving overweight and PC expectations have come down. We've seen the same happening with communications equipment over the last few days.
We like technology stocks which have strong leading franchises and leading market shares. Companies are attractive if they have quality management, have been through similar economic cycles and have seen a collapse in multiples down to an appealing valuation.
The earnings estimations for Compaq have to come down further and the valuation already reflects this. The risk to earnings is much less than the risk to stock price and is trading at 0.6 times sales, which is in line with its historic trough level.
What has the state of the US market meant for the fund?
The strategy has remained the same and all it meant for the fund was that we were more defensively positioned. We did have cash and were underweight technology.
Our defensive positions included consumer staples and utilities, such as Colgate and Avon, which we have now sold. Our belief is that the market has started to move into a bottoming phase and we have been through the worst of the fall.
What is your outlook for the US?
The earnings outlook will not improve until the latter part of the year, around fourth quarter, and the market should start to discount this in advance.
Last year it took the market some time to respond to increases in interest rates so we are expecting some lag time for the markets to respond to the cuts. It will take time for the cuts to flow through and in the back half of the year we should see a recovery in the economy.
How much cash do you have in the fund?
At present it is fully invested due to the positive outlook for the US. The maximum cash we will ever hold though is 5%.
What will change sentiment in the US?
If you look at the indicators within the stock market sentiment has been pretty bearish. The consumer confidence numbers were out last week and were much more positive than expected. Last year was disappointing but over the long-term investors have seen gains and remain confident.
The interest rates cuts should improve sentiment, especially as Bush is talking about pushing the tax cuts through as soon as possible. There has been a large jump from consumers in terms of mortgage refinancing as lower rates have already been seen and there is more disposable income.
The large unknown factor is the wealth effect and what impact the fall last year will have on the consumer spending patterns. The other risk is international growth and the knock-on effect low European growth and concerns over Japan and Asia may have.
What risk controls are on the funds?
The US Growth fund is benchmarked against its peers and looks at the S&P 500 relative to the peer group. We monitor the top 500 stocks in the S&P 500 and the Nasdaq, our own stocks and compare them to Lipper.
The portfolio holds between 40-60 stocks and there are controls on each sector and stock specific weights.
The maximum weighting for any stock is no more than the index weight plus 3%. We have a diversified portfolio and the top 10 holdings cannot exceed more than 40% of the fund. At the moment the top 10 holdings constitute 32%.
We also cannot be more than half over or half underweighted in sectors which make up more than 10% of market. So if technology made up 20% of the market our minimum weighting would be 10% and the maximum would be 30%.
If a sector makes up less than 5% of the market we can be anything from zero to three times weighted.
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