toby thompson says the management style he used to run his newton fund will make the transition to his new charge
Toby Thompson is to utilise the contrarian style that marked his tenure on the Newton Higher Income fund on New Star's Higher Income fund when it launches on 4 February.
In an exclusive interview with Investment Week, Thompson, who joined John Duffield's asset management firm on 1 January, said he is not daunted by life without Newton's famous research resources.
Thompson's move was one of the highest profile of 2001. During his time managing the Standard & Poor's AAA-rated Newton fund, from 1 April 1996 to 2 July 2001, it was ranked third in the UK equity income sector. Over this time it returned 120%, on an offer to offer basis, compared to the sector average 74%.
The upcoming launch, a sub-fund of New Star's umbrella Oeic, will have a gross estimated yield of 4% and will be benchmarked against the FTSE All-Share Index. It will consist of between 50-70 holdings and will initially have 60%-65% of assets in the FTSE 100.
Define what you mean by contrarian investing?
I view the market as being made up of a lot of emotional human beings, and being emotional human beings, people fall in and out of love with stocks on an irrational basis. They do this not because of the fundamentals of a business but because of short term sentiment.
I divorce myself from getting sucked into market sentiment by using yield relative as an indicator of when sentiment is against companies. That is when I buy them. When sentiment is for them, I sell them.
I look for companies with reasonable fundamental growth prospects which are paying a reasonable level of yield.
When picking stocks for the portfolio, what balance do you strike between growth stocks and high yielding stocks?
Because of my contrarian discipline, all the stocks in the portfolio yield more than the All-Share. It is a traditional equity income approach with stocks that actually deliver yield, rather than a barbell approach which has fixed income to get the yield and growth stocks to give the capital appreciation. I buy stocks that can deliver both.
Will the investment policy on the New Star fund be similar to the philosophy you used at Newton?
Very much so. I think this style is appropriate for managing income funds and has been proven to deliver over time. If people are in an equity fund they must be after capital appreciation.
If they are in an income fund they must be after a higher than average yield. If they are in an equity income fund they must be looking for growth in that dividend or else they would be in fixed interest.
So, there are three reasons to be in an equity income fund. My view is that if all the shares yield more than the All-Share, so does the fund, and therefore you meet the requirement of a higher-than-average starting yield.
If you are invested in decent companies with reasonable growth prospects and solid cash flows, you are meeting the dividend growth target of the investors.
If you are buying those companies when everyone else doesn't like them and selling them back when everyone does like them, it means a fund can supply the capital appreciation element.
So, there is a very simple way of delivering against the three objectives that equity income investors require.
At Newton you were supported by a strong team of analysts to draw on, what resources do have to use at New Star?
There is a vast pool of resource out there from external broker analysts that I can draw on and get to do a lot of the work for me. It's no secret that the Newton research team are known for looking for global thematic long-term winners.
What I am doing in this fund is looking for undervalued UK short-term opportunities.
What is the risk-profile on the fund?
I describe it as high volatility, low risk. What I mean by that is volatility tends to be a relative measure, volatile against the All-Share because if I only invest in funds that yield more than the All-Share the fund has a very different sectoral profile to that of the All-Share, so it will deliver very different returns.
It is low risk because the absolute risk of the real money is low because you are buying into good companies that are well managed with sound balance sheets and good cash flow at a time when the market does not like them and they have been driven to low valuations. That means you have a valuation protection built in to the whole philosophy of the fund.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation