Trish bridson's Newton american portfolio is overweight communications, consumer cyclicals after events of 11 september
To have a US portfolio biased towards cyclical stocks just before 11 September is probably one of the worst fund management scenarios.
The Newton American portfolio was positioned exactly this way and was hit hard in the following weeks.
Despite a three-year return of 47.6%, the fund has plummeted 19.1% in the three months to 15 October 2001. The fund was launched in 1986 and is now £56m in size.
Trish Bridson (TB), fund manager Newton American, discusses her thought processes during the time and how she has adjusted her portfolio more defensively.
Jeff Munroe (JM), chief investment officer, outlines the global thematic investment process, which bolsters the managers such as Bridson.
As the US fund manager how have you responded to the incident in the US?
TB: The portfolio was not well positioned for what happened on the 11 September. We were tilted towards cyclical recovery, which is unfortunate as cyclical stocks were hit the hardest in the immediate aftermath. Stocks particularly affected were those in the leisure sector, such as Carnival, the cruise company, and the Four Seasons Hotel chain.
So having taken a knock in the first week, we slightly increased our defensive positions but felt it was too late to follow that all the way through.
As a result, we are still running the barbell portfolio we have had all year.
We have a good chunk in defensives in order to steady the fund in difficult times and have balanced that by also investing in a range of cyclicals. The portfolio is exposed to cyclicals both on the consumer side and on the basic materials side.
Although the portfolio has not changed that much, we have more cash than we would normally hold at around a 6% weighting. Luckily, an investor came in with a large amount of cash just after the disaster. As we are uncertain about the short-term outlook of the market, we have been slowly trickling that in.
What signs are you looking for before moving out of your defensive positions?
TB: I think we are simply waiting for the recovery to come. Our view is that the procedures put in place in the States over the past month have helped. The Fed aggressively cut interest rates with further cuts likely and the government came in with spending packages.
In the short-term the economy will see one or two more quarters of negative GDP growth, but the upside will be that the recovery will be quicker than it would otherwise have been. It is a tricky time because there are some tough quarters ahead of us coupled with some nasty numbers from the corporate sector. However, we are anticipating a recovery towards the middle of next year.
Have your unitholders expressed much concern following the tragedy?
TB: Interestingly, we have not had an enormous amount of concern from our unitholders. We meet people all the time and had told them how we were tilted so they haven't been overly surprised. People seem to have a fairly steady view about the US. They know it has happened and there is nothing that can be done. But as the tragedy will ultimately be the catalyst for a speedier recovery the US is still a good place to be.
What sectors are you overweight?
TB: Our biggest overweight is communications with an 8.5% exposure compared to just under 6% for the S&P. The US has been behind Europe in cell phone adoption and it seems that recent events have spurred some activity, which may quicken the catch up.
We are slightly overweight consumer cyclicals, which is split between retailers and leisure stocks. Travel-orientated stocks have all been hit hard since 11 September. However, the management of Cendant, a leisure business, is very solid and they have revised their numbers for next year.
Healthcare is an underweight but we are overweight pharmaceuticals as this is the only area that looks reasonably attractive on a valuation basis. Within this, we've been switching marginally from some of the higher multiple stocks into cheaper stocks.
We are overweight basic materials with good results from companies like International Paper (IP). In general, basic material companies are improving returns to shareholders. IP has seen restructuring and is closing down inefficient plants and when the upswing comes it will see much more earnings leverage than they have done in the past.
What about your underweights?
TB: As I mentioned, we have a 6% cash weighting, which means we are more underweight some sectors than normal.
Of the leading sectors we are underweight technology with a 15% holding compared to the 17% S&P weighting. The names we have are high basis, which means when tech rallies they will perform better than the market. These are names such as Microsoft, IBM and some smaller names such as Intercil, which is a play on wireless internet working. We try to balance cyclical and defensive names within the sector.
We are underweight consumer staples although we do like Phillip Morris, the tobacco company, and Coca-Cola. On a sector basis consumer staples have not done very well. We don't really rate companies such as Gillette, which has poor management and poor results and is expensive.
Insurers have been big beneficiaries in recent months but banks have been having a mixed experience. Some big names, like Citigroup, have been cementing their blue chip status, whereas the investment bank side has been struggling unlike the retail side. Other banks have been suffering from things like consumer credit quality. Longer-term we want to be underweight the financial services as a whole.
What is consumer spending and consumer confidence doing in the US?
TB: Consumer confidence was hit hard but spending was hit to a lesser extent.
In terms of the retailers, it's discount retailers which have done the best. Things look a little nervous for the next few months but this should come back reasonably strong in the ensuing quarters.
How do you go about choosing your stocks and constructing the portfolio?
JM: We have a team of global sector analysts who try to understand themes and big changes across the globe. They need to find out what the drivers are of the environment we are investing in. This results in a view of the world in general terms and creates a strong background for analysing individual stocks and assembling portfolios.
They provide analysis and input on stocks that the fund manager then uses to build portfolios. Our global thematic approach provides a tremendous infrastructure around the fund manager, which is a good environment for stock picking and should lead to a better consistency.
You believe in globalisation, yet you are based in London?
JM: Our feeling is that it is helpful to be a global company but have teams close together. This means we do everything together under one roof in London, rather than like other companies who try to be global by virtue of having a lot of local offices around the world. We did try it and lost a lot in communication so we are all based here and travel a lot.
So Trish will have a specified list of stocks to choose from and what does she do from there?
JM: She will have a range of research recommending companies to choose from. It then comes down to her to build the portfolio. There will be some things that our researchers don't cover, that she may be interested in looking at and will benefit from her own research on smaller things. They will probably be a smaller part of the portfolio but may be beneficial. The portfolio construction is a mixture of big input on larger stocks and her input on smaller stocks. We also have a team of global fund managers, whose portfolios will have US stocks in them, they can also be a resource from which Trish will pick up from time to time.
Is there a high level of commonality between funds then?
JM: Yes there is to some extent. I guess it would be disappointing to be doing all this research and not have the names in the portfolios. The weightings, however, are really up to the individual fund manager.
What controls do you have for risk?
JM: We have a central portfolio risk team that looks at risk from all sides of the portfolio. They try and understand whether the risk is consistent with the objective of the fund. Secondly, they will look at risk in terms of how different the portfolio is from the recommended list. Additionally, we measure the quantity of risk and where it is coming from. Whether it is acceptable risk or not risky enough. We want our risk to be very stock-based as opposed to being based on currencies or sector. It is a good group that works independently from the investment team on the clients behalf to ensure that we are doing things appropriately.
Trish, do you have a style bias?
TB: I suppose you would call it growth at a reasonable price or being focused on specific interesting stock stories. We are also very focused on what we pay for them. We'll buy anything that is a good stock and has an attractive valuation.
Do you have target prices or when do you decide to get out of a stock?
TB: This is really determined by valuation or change in a company. If a company changes, goes wrong or earnings forecasts have to be revised downwards, we will get out.
FUND MANAGER: Trish Bridson
Started in 1988 as an investment analyst in US equities at Equitable Life Assurance Society.
In 1993 moved to take on the role of manager of the
US equity fund at Sanwa International.
ESN Pensions Management as US equity fund manager.
In 1994 became
director and US/Global fund manager at Dresdner RCM Global Investors UK.
Currently director, head of US investments, at Newton Investment Management.
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