One of the principal arguments for investing in equity funds is the outsourcing of research and management of securities that can lose or gain huge amounts in a relatively short space of time.
Many people who own shares in companies outright have experienced the pain of holding ‘blue chip’ firms and then by not paying attention to the minutiae of forces affecting the share prices, only to then ‘check in’ and find they have a lost a lot or nearly all of their hard-earned cash.
By paying a small percentage of the portfolio to a fund manager, you benefit from them making this their daily, and often nightly, profession. At least you hope to.
Take for instance commodities and utilities. The world will always need oil and energy right? However, stocks in both sectors have seen huge weakness in their value in recent years that were unforeseen by many and particularly painful for those with concentrated portfolios with direct holdings in these areas.
While diversification is a key tenant of fund management, active managers do take big bets on occasion. Here we take a look at three managers who have outperformed over the longer term while having a relatively large position of their funds’ total assets in one stock.
Mark Slater – Hutchisons China MediTech
The manager of the MFM Slater Recovery and MFM Slater Growth funds holds Hutchison China MediTech at just shy of 10 per cent in both funds – his largest positions.
Slater believes it offers investors the chance to get access to China’s burgeoning healthcare sector but benefits from greater security by being listed in the UK on the FTSE 250.
“It is a very interested company and we believe it can go a lot further on a five-year view,” Slater said.
“They are a national champion for the Chinese. It is the leading drug development business in the country bar none. They are miles ahead of anyone else. With a fair wind next year they will have five or six drugs in phase 3 trials, which is extraordinary. It is a success story.”
“We were initially attracted to its healthcare division, which is a fairly straightforward growth business with a record of strong earnings and revenue growth.”
“It is also enjoying clearly identifiable drivers of future growth, such as growing consumer spending power, brand strength, an effective sales network and the fact that the government is prioritising healthcare spending.”
The stock has gained 295.62 per cent over the past three years. By comparison the FTSE All Share has gained 36.33 per cent.
Performance of stock and index over 3yrs
However, Hutchison China MediTech has come under pressure in recent months in line with the other Chinese exposed names.
Mark Martin – Carpetright
The manager of the £590m Neptune UK Mid Cap fund holds Carpetright, one of the UK’s biggest retailer of carpet and other floor coverings, at 9.29 per cent of the total portfolio.
The FE Alpha Manager bases his bullish view on the firm primarily on the company’s significant self-help potential as well as exposure to UK and European economic recovery.
“Carpetright has recently appointed new management following the retirement of its founder. It is now undergoing a significant site rationalisation, exiting leases on underperforming stores and moving to convenient high street locations to materially reduce fixed costs,” he said.
“The company has improved its online offering and has launched an interest-free credit service which should facilitate upselling to more premium products.
“Carpetright is geared into increasing disposable incomes and housing trends. Home improvement spending on big ticket items should benefit from falling fuel and food costs for consumers, encouraged by rising house prices and all the major political parties have highlighted increased UK housing supply as a policy priority providing a further tailwind regardless of who wins the general election.”
The stock is down 12.65 per cent over three years but has been rallying hard since the end of 2014.
Performance of stock and index over 3yrs
Nick Train – Unilever
While Unilever is not so much a contrarian positon, being one of the most widely known stocks for many retail investors and one of the largest by market capitalisation, it has found decreasing favour with fund managers thanks to its strong growth and worries that this has been overly attributed to ‘bond tourists’ in search of yield.
Not so for Nick Train, who manages the £1.6bn CF Lindsell Train UK Equity fund. He has 9.4 per cent of his portfolio in the stock, having held it for many years and has rejected any worries over its so-called status as a ‘bond proxy’.
“Falling inflation – one result of plummeting energy costs – and straitened government balance sheets mean one thing: a continuation of extraordinarily lax monetary policies worldwide. Fiat money will find its way quickly into financial assets, particularly those that offer any certainty of real, inflation-protected returns over time.”
He says ‘blue chip’ equities such as Unilever are an obvious beneficiary of this trend.
“The dividend is growing ahead of inflation and is, according to Merrill Lynch’s analysts, the second ‘safest’ dividend across the whole of Europe. Meanwhile there are billions of savings across Europe – euros, Swiss francs, krone – that offer negative interest rates.”
“It actually costs you to deposit cash with certain banks. In these circumstances why wouldn’t you invest more into Unilever?”
The stock has gained 45.25 per cent over three years, beating the broader market although it has not always been ahead of the FTSE All Share and has underperformed other parts of the market when stocks were rising fast.
Performance of stock and index over 3yrs
