Hudson has managed his five crown-rated Schroder UK Alpha Income fund, which used to be a Cazenove portfolio, since its launch in May 2005 and the manager has built up a decent track record by using a business cycle approach to the equity market.
According to FE Analytics, the £850m fund has been a top quartile performer in the IMA UK Equity Income sector since its launch with returns of 124.94 per cent, beating its FTSE All Share benchmark by close to 25 percentage points.
Performance of fund vs sector and index since May 2005
Source: FE Analytics
Hudson also boasts top quartile returns, and has comfortably beaten the index, over three, five and seven-year periods.
However, experts will more often than not warn investors to review their holding in a fund if the manager takes on more mandates and in this case, Hudson has been given one of Schroder’s most popular and largest funds.
Nevertheless, when asked whether taking on his new multi-billion pound portfolio would affect his ability to manage his income fund, he was quick to calm his investors’ fears.
“No, not at all,” Hudson (pictured) said.
“We’ve got a great team of people and we have been doing the business cycle approach for a long period of time. From that perspective, we are very comfortable and it is a great opportunity to take on something that has a slightly different remit.”“One sits in the All Companies sector and the other sits in the UK Equity Income sector - they are different products but they are using common philosophies.”
Hudson was speaking at the FE Select 100 UK Equity Income event alongside Royal London’s Martin Cholwill, FE Alpha Manager James Henderson, Threadneedle’s Richard Colwell and the Unicorn managers Fraser Mackersie and Simon Moon.
The delegates included Gary Potter at F&C and Hawksmoor’s Richard Scott.
Tim Cockerill, investment director at Rowan Dartington, also attended the event and agrees that Hudson has a good team behind him and is well-versed in the art of business cycle investing.
However, while Cockerill says Hudson is in a strong position as anyone to take over the Schroder UK Opps fund, he would be slightly concerned if he was a unit-holder in the UK Alpha Income fund.
“I would want to ask, how much time are you going to be able to dedicate to the two funds and how is this going to work?” Cockerill (pictured) said.
“Clearly, the income fund has been his number one priority and now he has another, much bigger, fund to run. He clearly won’t be able to dedicate as much time to the income fund in the past, so I would need to find out his response and make a call after that.”“He is head of equities now and you’ve only got so many hours in day. The question is whether he will be able to spend enough time on his income fund to make sure it performs as well as it has done in the past.”
Cockerill also points out that there are very few UK managers who run an income and a growth fund.
One manager who has done it well, according to Cockerill, is James Henderson with his Henderson UK Opportunities investment trust and his Henderson UK Equity Income & Growth fund, though the latter doesn’t sit in IMA UK Equity Income sector.
There is a lot of expectation on Hudson in terms of his new UK Opportunities fund, given its size and track record under Dean.
According to FE Analytics, Schroder UK Opps has been the seventh best performing portfolio in the highly competitive IMA UK All Companies sector over 10 years with returns of 207.48 per cent, beating the FTSE All Share by more than 80 percentage points.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It also beat the sector and index in each year between 2008 and 2013.
Despite its long-term outperformance, some investors had started to voice concerns about its recent lacklustre returns.
Questions over its size and Schroder’s acquisition of Cazenove were raised; however Dean said the fund had fallen short of the sector and index due to stock specific issues.
Hudson’s income fund has also underperformed this year, although not to the extent of the UK Opportunities fund, and the manager attributes that to taking too long to move out of mid-caps.
“Twelve months ago, we started to make the transition away from what we saw as early cycle cyclicals, away from mid-caps and into large-caps. In hindsight, I wish we had been much, much more aggressive in doing that move,” Hudson said.
“We thought we had time to make that move but we should have gone more quickly. However, we were making that transition and that’s important when you look at the relative performance of cyclicals this year against last year.”
Due to his business cycle approach, the manager looks for companies that he thinks are best placed outperform in the expected economic backdrop and shifts his portfolio accordingly.
He says he has been moving into later cycle, more defensive companies like pharmaceuticals and telecoms, but not to tobacco or utilities.
“If you look at performance year to date, that has been completely the wrong defensive skew to have on,” Hudson admitted.
Performance of indices in 2014
Source: FE Analytics
“I’m still keeping that relative value approach that says ‘what am I paying to access for these assets, what are their long-term relative rate of growth and what is my business cycle view?’”
“Our view is that we are still in an expansionary, not a slowdown, phase and therefore to get into SAB Miller, tobacco stock, utilities or even Unilever you are locking into a very low rate of growth at a massive premium.”
“If our view that the economic cycle was going to hit the buffers very soon, then clearly that would be a more interesting position and maybe we would accept paying those multiples. However, that is not our central thesis.”
Mike Deverell, investment manager at Equilibrium, told FE Trustnet that his concern about Schroders’ business cycle process is that after years of mass central bank intervention, locating which point we are at in the cycle is becoming increasingly difficult to do.
Hudson defends his strategy and expects his fund to get back on track.
“We accept that we are going into later cycle assets, but we are keeping that valuation discipline. I’m obviously disappointed and I understand what clients are saying, but I don’t think it has been because we have been missing what’s changed in the business cycle, it’s been the way we have interpreted it so far has not worked.”
Schroder UK Alpha Income has a yield of 4.1 per cent and has ongoing charges figure (OCF) of 0.91 per cent.
