Elaine Crichton, manager of the Aegon US fund, favours a cyclical weighting believing defensives may have run their course
Elaine Crichton, manager of the Aegon American fund, is moving towards the cyclical end of the market believing defensives have run their course.
Crichton said as defensive stocks are looking fully valued, she is taking a more cyclical bias with the portfolio, although on a sectoral basis the fund remains neutral in light of the continuing volatile environment.
With a small underweight position in consumer staples and financials, the Aegon American portfolio is slightly overweight industrials. Crichton said she is focusing on stock specific opportunities and trying to ensure the portfolio does not get exposed to problems such as Enron.
She has had sole responsibility for the fund for just two years, taking over from Neil Smeaton who left to set up his own hedge fund company, but she has 16 years experience in the US market. The fund has a fairly conservative remit following the index quite closely and using a stockpicking approach through the expertise of the group's in- house team of analysts.
Crichton noted Aegon is currently going through a process of rationalising its retail fund range and is looking to launch a more focused US fund when that process is complete.
The AA rated Aegon American fund has fallen 6.1%, bid to bid, for the three months to 27 January compared to the North American sector average returns of -4.8%, ranking the portfolio 80 out of 91. Its one- year figures are marginally better with the portfolio ranked 61 out of 87 funds on the back of returns of -37.1%, offer to bid, compared to average returns of -35.61% over one year to 27 January.
Its three-year figures to the same date, a drop of 40.4%, after charges, was just above the sector average fall of 41.8%, placing the portfolio 29 out of 74 North American funds. The fund has a below average annualised standard deviation score of 6.3%, with the mean North American sector fund scoring 6.6%.
How has your experience in the American market helped you run the fund?
Having been in the same market for so long has definitely helped. I remember my managing director at Alliance Trust my first company said I was very lucky being able to see a bear market so early in my career. I thought I was getting sacked but that experience was definitely useful for knowing how to deal with current market conditions.
What is your investment process?
It is very fundamentally based and has been like that since launch. It is very bottom-up driven and we aim to outperform by getting lots of small decisions right, we don't take huge bets. The fund has 80 to 100 stocks and currently we are up towards the higher end of that band.
Is there a macro economic element to the way the fund is run?
I don't sit at my desk thinking 'this is going to happen to interest rates so we must increase our exposure to financials'. It is much more a case of looking at individual stocks and buying them if we think they are well placed to perform.
How do you decide which companies to buy?
We have a big in-house team of analysts who are split into five sectoral areas: tech, media and telcoms; cyclicals; resources; financials and defensives. They have to look at these stocks on a global and also on a local market basis. They assign ratings of one to five on companies and these ratings are measured against the subsequent performance of the stock price. These analysts are remunerated according to the efficacy of their ratings. The aim of the fund is to fill the company with stocks rated one.
Does this mean you don't have much direct contact with companies yourself?
No, fund managers are also actively involved in analysing individual companies and that research will feed back into the work of analysts. If I go on a trip and spot a company that I think we should possibly put in the fund, I will feed that through to the analysts who will then rate it.
What are you doing with your US fund range?
Aegon is tidying up its retail fund range. We are closing some of the smaller funds and looking at possible gaps in the range. We have a tactical fund in every geographical area except the US so we are looking at opportunities to set one up. We are making sure that the rest of the funds have been fully reorganised before we open new funds though.
What is the tracking error on the fund?
It is generally low. It fluctuates around 1.5% from the S&P 500. But the fund mandate allows us to have exposure to small and mid-cap companies. There was a period last year when we had about 12% in the mid cap area, which is quite a big bet. At the moment that exposure is quite low, around 2%.
What are the other risk controls on the fund?
There is a rule that we will never be more than 5% overweight or underweight in any sector. Tech is about 13% of the S&P so we would never have more than 18%.
There is quite a lot of built-in control from the rating system. The analysts' ratings decide how much of any one stock is in the fund. A rating of one will mean a stock is up to double weighted. A five-rated stock is index -1%. This will mean most of these companies have no weighting, although the biggest companies will always have some representation in the fund.
Are you completely dictated to by the rating system or can you buy companies that have not been rated by your analysts?
I could occasionally take on a company that hasn't been rated if I saw a near term opportunity which would not last long in the portfolio.
There can be debate about ratings. If I see a one rating for a company I have concerns about I can go to the analyst and ask him to take these concerns into account. If for example I see a company with a one rating that is a serial destroyer of shareholder value I could ask the analyst to consider lowering the rating.
Do you have big sector positions on at the moment?
We have not really had big sector bets this year or last. We do have a minor underweighting in consumer staples and financials at the moment. We are overweighting industrials slightly, but generally we are hugging around the neutral mark.
At present we are concentrating on getting the right stocks within the right sectors. Last year and this year sectors have been stacked with haves and have nots. This makes it difficult to be overweight in a sector like energy and still avoid stocks like Enron.
The retail sector is similar, there are many haves and have nots. There is a lot of margin pressure and consumer spending is under pressure. You want to be in stocks that can operate in that sort of tough environment: companies like Wal-Mart, which have a dominant market position or Ebay, which benefits from the increase in online shopping. You want to avoid things like mainstream department stores because the consumer is getting picky.
In the current gloomy market conditions what do you look for in a company?
We want companies that can at least grow their top-line in line with GDP and then you want leverage on the earnings side. This means companies with large-scale restructuring taking place where they're cleaning up the balance sheets and retiring debt. There are a lot of these around at the moment unwinding corporate excess.
The Wall Street brokerage firms are a good example. Even though volumes are coming down in the market, the top line is improving and they have been cutting down on costs. You do have to work hard to find these stocks in the current environment.
What type of companies are in a position of strength in the current low growth environment?
One factor that many people seem to be ignoring is that the dollar seems to be on a weakening trend. That can benefit a lot of companies in the S&P 500. About 25% of the earnings in the index will benefit from a weakening dollar. Consumer staples companies like Coca Cola Enterprises and Pepsi plus energy companies that have a lot of overseas exposure.
How have market conditions affected your overall strategy?
There has been quite a lot of fluctuation between defensive and cyclical outperformance in the market from one day to the next. We have adopted a barbell strategy with a balance between cyclical and defensive names.
On the defensive side looking at drug stocks and consumer staples, on the more cyclical side looking at things like technology and consumer discretionary areas. If anything there is a cyclical bias.
FUND MANAGER: Elaine Crichton
Head of US equities at Aegon and manages the $100m American Oeic.
She joined Scottish Equitable in 1997 from Edinburgh Fund Managers.
Before that she worked on the US desk at Dunedin Fund Managers, Scottish Life and the Alliance Trust, an investment trust based in Dundee.
She graduated from Dundee University in 1987.
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