Savvides manages the £250m JOHCM UK Dynamic fund, which sits in the UK All Companies sector with a fairly consistent split across large, mid, small and AIM stocks since Savvides took over the fund at the height of financial crisis in June 2008.After several years of significant outperformance, mid and small caps sold off in March as investors took profits – amid a wider market sell off – and bought up more defensive large cap names.
However, several managers including another FE Alpha Manager Mark Slater have recently questioned whether there really has been a rotation yet.
According to FE Analytics, the FTSE 250 has fallen more than twice the rate of FTSE 100 since the start of the year with the FTSE Small Cap index a slightly better performer.
Performance of indices in 2014
Source: FE Analytics
The three indices were all in positive territory until the beginning of September when fears over global growth, US dollar strength and eurozone weakness prompted stock market falls heading toward 10 per cent.
Performance of indices since Sep 2014
Source: FE Analytics
Savvides says the fund’s weighting to FTSE 100 stocks is currently going up following sharp falls across the All Share that saw the large firms sell off harder than the smaller cap stocks.
“Despite all this chat that you have to be in the FTSE 100 this year, it has not been all about that. The high valuations in the FTSE 250 and Small Cap indices carried all the way to the end of Q3,” he said.
“It is only now with lots of profit warnings that you are consistently seeing the FTSE 100 on a 5.5 to 6.5 per cent yield and up to 7 per cent in the supermarkets.”
“They may cut the yields but it is only now that you can confidently say that there is such a gap between FTSE 100 and some mid cap and small cap valuations that you might want to reallocate capital. So it is not true to say that the FTSE 100 has outperformed this year.”
Inflows into JOHCM UK Dynamic have picked up significantly over the past year from £100m to £250m.
Savvides, who has around 5 per cent in AIM stocks, says the index has been the worst performer this year due to its very heavy skew to energy and mining, which in the micro cap space have had a torrid few years.
His current top ten holdings are all traditional defensive large and mega cap stocks such as BP, HSBC, Shell, AstraZeneca and GlaxoSmithKline.
The fund has significantly outperformed since its inception returning 100.1 per cent, more than double the IMA UK All Companies sector average and the gain in the FTSE All Share, as well as being the 12th best return in the sector over this period.
Performance of fund, sector and index since June 2008
Source: FE Analytics
While the fund has lost money over the course of the year – 2.28 per cent – it has beaten the sector and index which have lost 5.45 per cent and 3.53 per cent respectively.
Savvides says moving out of almost a third of his positions over the course of the year has helped performance.
“We ended up selling quite a few of our stocks over the course of the year - 14 of 48. We sold out of Tesco at the end of 2013. We didn't like the way the industry conditions were progressing. You know what has happened since,” he explained.
“Sell decisions have been very important this year. It doesn't get talked about a lot but actually saving money by taking the sell decision has saved us 200 basis points in just four stocks.”
He says another driver has been the performance of healthcare stocks, which have been at the centre of most of the bid activity within the index.
“M&A really hasn't picked up materially but the size of deals has been picking up. It is all about balance sheets being in better places and finance directors being a bit more forward looking in cap-ex decisions.”
“However, if you haven’t been on the right side of healthcare, M&A has been a headwind of about 150 basis points relative your performance.”
The FTSE All Share Healthcare index is up more than 12 per cent since the start of the year while wider index is down 3.53 per cent.
Performance of indices in 2014
Source: FE Analytics
However, Savvides says the market has seen short-term glut of supply more generally, which has knocked back some risk assets, due to the scale of recent manager moves in the asset management industry.
“There has been a rethinking of equity exposure and so fund flows have slowed down a bit into equities and flood of equity coming back onto the markets.”
“With a lot fund manager moves there has generally been a huge flood of equity onto the market, which is affecting things in the short term at the moment.”