Group's UK Special situations fund will adopt a growth at a reasonable price (garp) approach
The forthcoming UK Special Situations fund from SG Asset Management's is to have a mid and small-cap bias.
Manager Hari Sandhu, who hopes to have launched the fund before the end of the year, is looking to buy stocks on a two to three-year view rather than focus on short-term gain.
The market cap bias of the fund, which is still subject to FSA approval, will be changed to meet the dynamics of the market.
The portfolio will have 50-60 holdings and Sandhu will invest using a four-stage model for picking stocks. This involves looking at the value of a company, its quality, catalysts for why it may improve in the future and newsflow.
Some 50% of the fund will be invested in companies that meet Sandhu's value criteria, a further 20%-30% will go into companies that fit the quality franchise model and the remainder will be split between the catalyst and newsflow categories.
Sandhu said the fund will be looking for under-resourced companies in the small and mid-cap area as there are no real marginal buyers in these sectors.
He added: 'We will be looking at cheap companies, focusing on absolute value and catalysts for performance. The fund will adopt a value driven, growth at a reasonable price (Garp) philosophy.'
Sandhu will be working with his former-UBS Warburgs colleague Hugh Sergeant on the fund. At UBS, Sandhu ran an institutional small-cap fund which he feels give him a competitive advantage and the track record to show he can manage a UK special situations fund.
Themes the fund will concentrate on include cyclical stocks that have improved their balance sheets through rights issues or self help, such as de-leveraging, which reduces risk and makes a stock buyer's analysis easier.
Companies that fit this criteria include ICI and British Airways. ICI is much more resilient following its rights issue, Sandhu said, and has also been restructuring. Because of the positive newsflow, its shares have risen from 200p to 260p.
BA has been identified for its good cashflow and Sandhu is planning to put it into the fund, although airlines are not an industry he plans to be in over the long term. He said there is value in the company and, with new management and a new strategy, it has rallied from 90p to 150p per share.
Consolidation is a story the fund will be looking to exploit, as will Garp ideas. Sandhu said he aims to stay clear of stocks that are still burning cash on their balance sheets due to high fixed costs and lack of profits.
The fund invests in stocks on a time horizon of two to three years as Sandhu believes investors willing to invest over this period will be able to take advantage of great opportunities.
He added: 'There is a lot of emphasis on short-term performance at the moment, which is misguided. We believe SG is a house that will back our judgements. We won't shoot the lights over six to nine months as, at the moment, it is all about identifying the core holdings for the portfolio.'
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