When reviewing funds for 2007 there are two approaches to adopt. The first is looking at past perfor...
When reviewing funds for 2007 there are two approaches to adopt. The first is looking at past performance and ensuring the funds selected have quality of management, consistency of performance and a clear indication of how the investment style influenced fund performance. The second approach requires us to consider what will drive this equity market over the coming 12 months.
With a well documented expectation for the US economy to move into a period of slower growth and the Federal Reserve fund rate to start reducing, Williams de Broë's favoured investment style for the next year is large-cap growth. However, there is always justification for the inclusion of a good stockpicking fund regardless of the market cap or investment style bias.
legg mason value
This portfolio is managed by Bill Miller, who is solely responsible for developing the investment policy and process for the value management style. Legg Mason Funds Management is a large-capitalisation US equity, bottom-up value manager. This approach has been consistently applied for more than 20 years, since the inception of the value trust, and has produced results well ahead of the benchmark and peer group over long-term investment time horizons. For the last 15 calendar years the fund has outperformed the benchmark and, while 2006 looks like being the year this record will be broken, the short-term returns are again outperforming the benchmark and peer group.
The investment process has a quantitative initial screening phase and then shifts to a more judgmental phase. Key variables include the price-earnings ratio, price to cashflow, the price-book ratio and return on equity. This screening process is responsible for 80%-85% of the names that are eventually purchased. Miller attempts to determine the underlying economic value of the business through research, which may involve discounted cashflow private market, liquidation and leveraged buyout analyses.
Valuation factors that are most important in evaluating companies are balance sheet strength, return on invested capital, the ability to generate free cashflow, pricing flexibility and position in their respective industries. The fund manager focuses heavily on management's ability to demonstrate and articulate a clear, value-creating capital allocation process. Other important qualitative factors that Miller incorporates into his analysis includes the assessment of management, business strategies, the competitive position of a product and the long-term outlook for its industry. His research focuses on evaluating a company's economic value and its ability to generate returns on capital above its cost of capital, thereby creating value for shareholders. A new name is added to the portfolio only when the fund manager is convinced it is trading at a very large discount (typically, 50%) to a conservative estimate of intrinsic value and that management is committed to long-term value creation.
Legg Mason believes superior portfolios are those that are tightly focused on the best long-term investment opportunities. It does not believe it necessary to have exposure to every company, industry or sector just because it represents an important part of an industry or benchmark. The portfolio typically consists of around 30-50 names its research indicates trade at significant discounts to business value and offer the best opportunity for the highest long-term risk-adjusted rates of return. Portfolio weightings usually differ significantly from their relative benchmark. Accordingly, returns may often significantly differ from those of the index. Portfolios are constructed and re-balanced so that the companies, which in its judgment offer the highest rates of return, represent the largest proportion of the portfolio.
As the name implies, this is a focused fund investing in a core portfolio primarily of 20-30 stocks selected for their growth potential. The investment style is best characterised as earnings and free cashflow orientated. Proprietary research with continuous company management contact drives the investment process, which favours rapidly growing companies. Financial modelling is used to identify companies with misunderstood fundamentals and price dislocations before this is recognised by the general market.
Portfolio manager Scott Schoelzel's flexible mandate enables him to invest in companies of any size, which typically share characteristics of impressive growth prospects, uniquely positioned product lines and a competitive position within its respective industry. The portfolio tends to be skewed towards companies benefiting from powerful secular growth trends and gives investors access to the leaders in rapidly growing areas such as technology, life sciences and telecommunications. It also offers investors the opportunity to capitalise on the growth and market dominance offered by some of the world's most dynamic companies.
Despite continued macroeconomic headwinds there are still companies that will thrive in this environment. Janus analysts will remain focused on uncovering these opportunities for their investors.
Vitality at Work scheme
Reporting to Steve Hill
Appointed on 19 September
Plans to double size in five years
Unnamed company valuation reduced