Barton (pictured), who heads up the investment management of the WDB Oriel UK fund, says that managers who hold a high number of stocks are often too afraid to venture away from their benchmark. He says many hide behind the guise of being "well diversified", even though there is an argument that they expose investors to greater risk by being so non-selective.
"A key difference between me and my competitors is that I have only 25 holdings. I prefer running portfolios this way," he said.
"Some people seem to think this is a hugely small number, but I don’t think so. People seem to think a smaller number of holdings means funds are more risky, but to me it seems a lot more risky to invest in companies that I don’t fully understand."
"It’s a lot better to be invested in companies that you know well and are confident with. I’m not interested in relying on an analyst to cover companies for me – I want to understand them myself."
He attributes the short-termism of managers to the pressure of underperformance.
"It comes down to pressure, namely from banks, pension providers and of course the media," he said. "There is a demand on fund managers to outperform over periods that are absolutely unrealistic."
"It is difficult. When days of underperformance turn to weeks, and weeks to months, you do feel the pressure. If you look at us, the latter part of last year we struggled, but my reaction was: 'we were right to do that'."
This long-term focus is beginning to pay off, though Barton has only run the fund since 2007.
Moreover, due to a number of fund mergers, the record of WDB Oriel UK can only be traced back three years.
The fund has beaten its IMA UK All Companies sector and FTSE All Share benchmark over the period.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
"By the standards of the industry, we’re very long-term. I spent 2 basis points on commission last year. Portfolio turnover is under 20 per cent," Barton continued.
"I think the short-termism in the industry is a huge issue. I personally think a lot of managers are running funds in a way that simply can’t work. They’re trying to anticipate short-term movements, which is very difficult to do and very expensive."
"If you can do it that way, then well done – good luck to you. But personally, I don’t see how it’s possible to do it in a sustainable manner."
"To be honest, I’m delighted so many people try and do it that way, as their higher turnover means I’m a step ahead straight away on costs alone," he added.
Oriel uses a strict three-part screening process across its entire range of funds.
Understanding how the business works is the first stage.
"If we don’t fully understand it, we don’t hold it," said the manager.
Next, Barton determines whether the business is economic over the entire business cycle, and last but not least, he asks himself: "Do I trust the management of the company?"
After the screening process, Barton creates a portfolio of around 25 stocks based on valuations.
While highly concentrated portfolios are usually associated with higher risk – often measured by volatility – Barton points out that this is not always the case.
"People think that greater concentration equates to greater volatility, but the irony is that we actually come out less volatile over time," he said.
"We’re not particularly concerned by this and certainly aren’t aiming for it, but it just goes to show the misconception."
Our data shows that the WDB Oriel UK Fund has an annualised volatility of 12.74 per cent over three years, compared with 14.24 per cent from the UK All Companies sector average.
The fund also has a lower max drawdown, and inevitably comes out on top on a risk-adjusted return basis as well.
Risk/return of fund vs sector over 3yrs
| Name | Total return (%) | Ann. Vol (%) | Max drawdown (%) | Sharpe ratio (%) |
|---|---|---|---|---|
| WBD Oriel UK | 48.64 | 12.74 | 17.19 | 0.67 |
| IMA UK All Companies | 42.14 | 14.24 | 17.89 | 0.53 |
Source: FE Analytics
Barton does not believe volatility is a fair measure of risk, even though his fund scores healthily on this metric.
"We see risk in terms of permanent capital loss, not in volatility terms. It’s when you get volatility in the market that you get the best opportunities," he said.
The manager measures his risk control in a very different way to other fund managers.
"The biggest risk control is knowing who is invested in you," he said. "In my opinion, significantly investing my own money gives comfort to the other investors that I am committed to my focus on avoiding permanent capital loss and enhancing the value of capital allocated to the fund."
Barton thinks many fund managers blindly follow their benchmark. This, he says, can be very dangerous.
"We don’t have this problem," he said. "Our approach to benchmarks is that we’re aware of them, but certainly not driven by them."
"If you run your portfolio according to what’s in the index, you can run in to big problems, because in my opinion a lot of what is in the FTSE All Share shouldn’t be in there at all."
"Just look at mining – it makes up a huge part of the index, but most stocks have nothing to do with the UK at all – they’re beyond the pale."
"Mining is important, of course. Similarly, if you take something like oil, the impact of its price on businesses is hugely important and so I think it’s crucial to look at my exposure to it."
"But am I going to have the same in oil companies as the index? Not necessarily."
Barton says he would prefer to be even more concentrated, but that certain regulations prevent him from being so.
UCITS regulations state that a manager can only have 40 per cent of their assets in transferrable securities that have more than a 5 per cent weighting.
"In other words, I can only have a maximum of eight companies with a 5 per cent weighting," he explained.
"All things being equal, I'd have 25 holdings with 4 per cent in each, but this is never really achievable. For example, it is not prudent to have the entire portfolio 100 per cent invested at all times."
"Individual stocks will out/underperform on a daily basis and it is not practical to constantly 'correct' the weighting by reacting to that."
"We also take a gradualist approach both to building positions and to exiting; at any one time a transitional percentage holding may exist. These are just some of the factors that cause a variation of the percentage holdings in each stock."
Barton has 35 years of investment experience. He returned to fund management at Williams de Broë in 2007 after spending time as a banks analyst, including at Credit Suisse First Boston where he was head of the pan-European banks team. He is a former head of UK equities at Norwich Union.
WDB Oriel UK requires a minimum investment of £5,000 and has an ongoing charges figure (OCF) of 1.93 per cent.
