There is natural herding in the fund management industry, with many of the same stocks appearing in portfolios. GlaxoSmithKline is a good example – it is held by more than 10 per cent of the 3347 funds in the IMA universe and 65 out of 89 funds in the IMA UK Equity Income sector, according to FE data.
Many managers are compelled not to stray too far away from their benchmarks, and mass inflows into the best-performing funds enhance the herding effect.
However, this hasn’t stopped some well-known managers taking unusual top-10 positions in their portfolios, to help distinguish themselves from their rivals.
CF Woodford Equity Income – Imperial Innovations
The recently launched fund is headed up by one of the UK’s most well-known managers – FE Alpha Manager Neil Woodford.
The top-10 of the fund is dominated by defensive blue chip companies, but one sticks out like a sore thumb: FTSE AIM-listed stock Imperial Innovations.Woodford (pictured) has 3.8 per cent of his portfolio in the academic research company, which he held for many years at Invesco.
However, because his new fund is much smaller than his previous ventures, it accounts for a larger proportion of assets for the time being.
The stock is extremely volatile, only making 40.48 per cent over the past five years.
Over this period it has a max drawdown of more than 60 per cent, but has had a much better 12 months or so.
Performance of stock and index over 5yrs
Source: FE Analytics
Since Woodford launched his fund on 2 June 2014 the stock has gained almost 10 per cent.
The manager prides himself on being a long-term investor, and so steep losses or gains in the short-term are unlikely to faze him.
The company recently announced plans to raise £150m from investors to grow its investments in university spin-out companies and hopes to double its current level of investment in academic based companies over the next few years.
Woodford has a history of investing in healthcare companies, having previously held significant positions in several companies up and down the cap scale whilst a manager at Invesco Perpetual.
Imperial Innovations is held by only one other fund in the IMA universe: the £100m Sand Aire First Ilona Long Term Cap fund.
AXA Framlington UK Select Opportunities
FE Alpha Manager Nigel Thomas has always been keen to distinguish himself from his peers in IMA UK All Companies, but mass inflows into his now £4.6bn AXA Framlington UK Select Opps fund has seen large cap exposure rise in recent years.
The manager’s top-10 is by no means a run-of-the-mill large cap portfolio, with ITV and Shire among his biggest bets.
However, one stock stands out from the crowd – a 2.7 per cent position in plastics supplier Essentra. The FTSE 250 company has gained over 620 per cent over the past five years.
However, over the last four months it has suffered a similar fate to many mid-cap companies, and is down more than 13 per cent.
Performance of stock and index over 5yrs
Source: FE Analytics
Essentra is held by six other funds as a top-10 holding in the IMA universe: AXA Framlington UK Mid Cap, BlackRock UK Absolute Alpha, BlackRock UK Equity, BlackRock UK Focus, SJP UK Absolute Return and SVM UK Growth.
Deutsche Bank recently reissued its buy rating on shares of the company, seeing the recent falls as a potential opportunity for investors.
Fidelity Special Situations – Smurfit Kappa
This £2.9bn fund managed by FE Alpha Manager Alex Wright holds peculiarly-named paper-packing company Smurfit Kappa as its seventh largest holding, making up 2.8 per cent of the portfolio.
Wright is as a deep value manager, targeting out-of-favour stocks he believes are set for a re-rating.
He currently has top positions in large cap names such as Barclays, HSBC and Lloyds. However, his style often leads him down the market cap scale into the FTSE 250 and even FTSE Small Cap indices.
Though he runs assets running into the billions and has a relatively high turnover, his conviction in smaller companies has seen him make significant changes since taking over from Sanjeev Shah, with Smurfit Kappa a good example.
The stock’s share price has gained 361.29 per cent over the past five years, with much of these gains coming over the past two years.
Performance of stock and index over 5yrs
Source: FE Analytics
Again, the stock has tumbled more recently, and is down more than 20 per cent over the past four months.
The £61.6m Ecclesiastical Amity European portfolio is the only other IMA portfolios that holds Smurfit Kappa in its top-10.
Investec UK Special Situations – QinetiQ
The £1.2bn fund is managed by another deep value contrarian manager: Alastair Mundy (pictured).
Mundy has also been one of several managers to build up a substantial cash weighting over the past 12 months, citing a general lack of value in stock markets.Investec UK Special Situations cash weighting currently stands at 11.6 per cent of the fund.
However, he still has conviction in certain stocks – especially in blue chip companies that haven’t kept up with the rally, such as BP, Shell and HSBC.
The manager’s ‘go-anywhere’ mandate has also seen him build exposure to little-known defence company QinetiQ, which is his ninth largest holding.
Over the past five years the FTSE 250 stock has failed to keep up with the market, managing returns of 63.3 per cent over 5yrs.
Performance of stock and index over 5yrs
Source: FE Analytics
QinetiQ had a miserable time in 2010 and 2011, and despite a better period of returns recently, Mundy still thinks there is significant upside in the stock, Eight other IMA funds hold QinetiQ as a top-10 holding, with most having a deep value focus.
These include Aberforth UK Smaller Companies, JOHCM UK Dynamic and GLG Undervalued Assets.
Henderson UK Equity Income & Growth – Velocys
Dividend-paying blue chips tend to dominate UK equity income funds, but FE Alpha Manager James Henderson has a habit of looking off the beaten track.
He prioritises total return above a high yield, which often leads him into small and mid-caps which have a higher potential for capital growth.
AIM-listed alternative energy company Velocys makes up 2.1 per cent of the £560m Henderson UK Equity Income & Growth portfolio, alongside more popular mega caps such as BP, Royal Dutch Shell and Rio Tinto.
The chemicals company specialises in converting problem gases into valuable liquid fuels. The significant increase in natural gas discovery has been a big driver of the company’s share price in recent years.
Velocys has a market cap of just £273m, and doesn’t currently have a yield.
Henderson’s fund exited the IMA UK Equity Income sector last year because he didn’t want to be constrained by a yield target.
Over the past five years the company has gained over 300 per cent with most of these gains made over the past two years.
Performance of stock and index over 5yrs
Source: FE Analytics
Only one other fund in the IMA universe holds the stock as a top-10 holding: the top-performing CF Ruffer European portfolio, which has a 4.9 per cent stake.
