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Morgan: Why I'm sticking by AXA Framlington American Growth

20 May 2014

The analyst says that management team is sticking by their strategy despite a recent poor period of performance.

By Thomas McMahon,

News Editor, FE Trustnet

The £585m AXA Framlington American Growth fund has been hit by a sharp sell-off in growth stocks, according to Rob Morgan, analyst at Charles Stanley Direct, but won’t be changing strategy.

The fund, managed by Stephen Kelly and Dan Harlow, has had a torrid 2014 thanks to its weighting to technology and biotechnology.

ALT_TAG However, Morgan (pictured) says that investors shouldn’t jettison the fund as it represents a solid growth strategy for the longer term.

“It’s been something of a perfect storm lately for Stephen Kelly, manager of AXA Framlington American Growth Fund,” he said.

“The fund’s long-standing bias to exciting growth areas such as biotech and technology have served him well in recent years, but that same exposure has caused a dramatic decline in performance since March this year.”

Data from FE Analytics shows that the fund is now behind its sector and index over three years, having fallen further than its peers in the March sell-off.

Performance of fund vs sector and index over 3yrs

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Source: FE Analytics

However, Morgan says that the managers are sticking to their guns and expect the stocks they hold which were hit by the sell-off to recover.

“I recently spoke to co-manager, Dan Harlow, on what it means for the fund and the prospects going forward,” Morgan said.

“The simple answer is that the managers are in no way changing their strategy. Yet neither do they want to stand in the way of what could be a further period of weakness in these areas. Therefore, they are maintaining their current positions.”

“Mr Harlow explains that biotech firm Gilead, a significant position in the fund, was at the epicentre of the recent sell off.”

“After stellar performance over the past two years, news of a congressional inquiry into Gilead’s pricing for Sovaldi, its new blockbuster drug for Hepatitis C, contributed to heavy profit-taking in the stock.”

Performance of growth and value indices since Jan 2013

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Source: FE Analytics

“This then spread to the wider biotechnology sector, and subsequently the technology sector in what he describes as a “PE protest” – investors suddenly growing wary of the high price of certain stocks in relation to their earnings.”

“Some growth companies did look stretched with PE ratios of 30 or more. Suddenly a tipping point was reached, and following the initial wave of selling more investors followed suit as the strong recent record of cherished stocks such as Facebook were broken.”

“Mr Harlow reasons that it is harder to value companies in the early stages of their growth trajectory, so phases of volatility in these areas are to be expected.”

“What is important, in his view, is that nothing has structurally changed for these firms. It is simply a matter of investor sentiment.”

“As the dust settles they will look to add to favoured holdings in the expectation that they have identified companies with superior growth prospects that in the long term will provide strong returns.”

“The managers believe that in a “slow growth” environment, such as the one we currently face, investors are likely to pay a premium for companies with strong growth and management.”

“They see parallels with the 1970s when a select band of stocks (known as the “nifty 50”) flourished with investors cherishing their consistently high growth in earnings.”

“Fortunately, other key holdings have performed well in the recent difficult period. Electricity provider ITC Holdings and oil and gas firm Concho Resources have both fared well, demonstrating that diversity of the fund.”

“However, recent volatility does underline the fact that the fund can be riskier than many of its peers.”

“In the longer term a growth strategy such as this one has the potential to tap into some of the world’s fastest growing companies in areas such as healthcare, technology and industrials.”

The fund has ongoing charges of 0.82 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.