Diversification is usually considered necessary to improve risk-adjusted return, with this seeming to imply that high conviction funds are more risky. But Barton says a highly concentrated portfolio coupled with a good stock selection is good for both risk and return.
“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," he said
"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."
With this in mind, here are three examples of funds with managers taking strong conviction plays on stocks.
Argonaut European Alpha
This £267m fund, managed by FE Alpha Manager Barry Norris, invests mainly in European equities.
Its conviction led portfolio means it has more than half concentrated in just 20 stocks and its five largest holdings make up almost a third of the portfolio.
The five crown-rated fund has been steadily increasing its exposure to peripheral Europe, the worst affected part of the eurozone crisis following its 2011 sovereign debt crisis for a year.
Norris’ contrarian positioning is evident in the fact the fund’s largest holding is Banco Commerical Portugues, which makes up 7.1 per cent of the fund.
He is making a high-conviction play by buying up arguably the most out-of-favour stocks in Europe: peripheral banks.
Other large holdings are in peripheral European Banks including the Spanish based Bankia, which is the second largest holding, at 6.8 per cent of the portfolio.
The Italian bank Intesa SanPaulo and the Greek bank Piraeus, are the fourth and fifth largest holdings, making up 5.9 per cent and 5.2 per cent of the fund.
Greg Bennett, deputy manager of the fund, recently said he believes the European recovery is still two to three years behind that in the US and the UK, and anticipates further upside from equity markets as a result.
Over three years, the fund has returned27.84 per cent beating its IMA Europe ex UK sector average, which was 22.96 per cent and its benchmark – the MSCI Europe ex UK index – which has risen 18.84 per cent.
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
The fund also has a low cash holding of 0.32 per cent, another arguable criteria of conviction-led investing, as some analysts might suggest that managers with strong convictions in stocks would know where to put it.
Charles Younes, analyst at FE, says Norris’s investment style is heavily differentiated from general market sentiment and other investment groups.
“It can be partly explained by the limited resources available at Argonaut, but it is an interesting approach and the performance of the fund so far has justified it,” he said.
“The fund’s profile is slowly becoming more aggressive and price swings may increase. However growth in Europe remains fragile and unexpected bad news could threaten the chances of analysts revising their outlooks.”
Jupiter European
Another Europe focused fund with a high concentration of stocks is this £2.5bn fund managed by FE Alpha Manager Alexander Darwall.
It has 57.27 per cent of its portfolio in just 10 stocks, with a bias toward pharmaceuticals and biotech.
Its largest holding is the Danish pharmaceutical firm Novo-Nordisk, making up 7.74 per cent of the portfolio.
Over three years, it has stayed ahead of its IMA Europe sector average and benchmark, with returns of 28.54 per cent.
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
Younes says Darwall’s approach to investment does not look original on paper, but the quality of his analysis makes all the difference.
“He has impressed with his detailed knowledge of companies – not only does he try to assess their future value compared with their current worth, he wants to understand how they will differ from their competitors over the long-term.”
“He achieves this through direct contact with a company, cross-referencing and by putting his extensive experience of investment to good use.”
“Consistent sector- and benchmark-beating performance in what has been a difficult market over the last five years underlines the manager’s quality.”
True to its conviction led style, the portfolio has a very low cash-weighting of just 0.09 per cent.
Wise Investments Evenlode Income
Evenlode Income is a five crown-rated portfolio in the IMA UK Equity Income sector. It holds just 31 stocks with 56.8 per cent of the fund held in just 10 stocks, mainly large and mega caps with an international focus.
Its largest holding – Unilever – represents 9.5 percent of the fund whilst its second largest holding – GlaxoSmithKline – makes up a further 8.2 per cent.
The £49.4m fund, managed by Hugh Yarrow, has almost doubled in size over the past year. Since its launch in October 2009 it has returned 86.19 per cent, beating the IMA UK Equity Income sector average and its benchmark – the FTSE All Share – by more than 20 percentage points.
The fund is a favourite of Premier’s Simon Evan-Cook, who recently said the fund could be a successor to Invesco Perpetual Income due to Yarrow’s similar investment style to the fund’s previous star manager Neil Woodford, who recently left to form his own venture; Woodford Investment Management.
Performance of fund, sector and benchmark since launch
Source: FE Analytics
Evenlode Income has a low cash weighting of 1.2 per cent.
