The top-performing Standard Life Investments UK Equity Unconstrained fund’s process and philosophy will remain unchanged, according to its new manager Wesley McCoy, who took charge of the portfolio from the Artemis-bound Ed Legget in June.
Legget had built up a strong investor following on the fund as his benchmark-agnostic value approach led to phenomenal returns for his investors, but he left the Edinburgh-based group to replace Tim Steer as the manager of Artemis UK Growth fund earlier in the year.
According to FE Analytics, over Legget’s seven-year tenure between April 2008 and June 2015, Standard Life Investments UK Equity Unconstrained was the second best-performing portfolio in highly competitive IA UK All Companies sector with returns of 210.61 per cent – beating the FTSE All Share by more than 150 percentage points.
Performance of fund versus sector and index under Ed Legget
Source: FE Analytics
While it usually underperformed in tougher market conditions as a result of Legget’s value style, the manager delivered top-decile returns in rising markets such as 2009, 2010, 2012 and 2013.
Those returns translated into strong inflows. Its AUM has surged from £400m three years ago to its current level of £1.4bn, meaning it has quickly turned into one of the most popular vehicles in the 274-strong peer group. In fact, the fund features in all three of FE’s Adviser Fund Indices.
Legget’s departure may have come as a blow to unitholders in the fund, but McCoy actually launched the fund and managed it for three years prior to the departing manager.
McCoy left Standard Life Investments in April 2008 to join his wife in Africa, where he worked in development finance. He returned to the UK with Odey Asset Management and re-joined Standard Life in 2012.
In his first webcall since taking over the portfolio for a second time, McCoy says he has no plans to change the fund’s philosophy or process.
“Today, the opportunity has arisen for me to go back to the product that I designed. I find the product as I left it by design; there have been some great investment returns while I’ve been away but we unplug Ed Legget (who is a great fund manager) and we plug myself back into a great process and great philosophy,” McCoy said,
Although relatively brief, McCoy had a very successful time as manager of the fund.
During his tenure between September 2005 and April 2008, Standard Life Investments UK Equity Unconstrained was the sector’s best performer and more than doubled the FTSE All Share’s gains with returns of 50.84 per cent.
Performance of fund versus sector and index under Wes McCoy
Source: FE Analytics
While it tended to be far more volatile than its peers, the fund generated the highest amount of alpha relative to the FTSE All Share and was top decile for risk-adjusted returns as measured by its Sharpe ratio during his time as manager.
McCoy says he plans to continue where he left off in 2008.
“Our understanding of unconstrained investing is that we have a research platform that doesn’t care how big a company is. What we are really looking for, through our ‘focus on change’ philosophy, is when companies’ change isn’t well-understood by stock markets and we are trying to find that change and see what the market is missing.”
“We are doing that, not only through fund manager intellect, but by taking advantage of all the great things we have here at SLI such as a large team, a real pedigree in markets and a huge pedigree in UK equity markets.”
The manager’s process, like Legget’s, is to have a highly concentrated benchmark-agnostic portfolio of undervalued FTSE 350-listed companies where he feels there is a potential catalyst for positive change. This is highlighted by its current list of top 10 holdings, which includes Crest Nicholson, Sage, BT and DS Smith.
Source: FE Analytics
Given that he is taking over from a highly popular manager, McCoy has been asked a number of times how his approach differs from Legget’s. He says there is little between the two of them in terms of understanding the market, but there are also going to be differences in the way they play those themes within their portfolios.
“This a question a lot of clients have been asking and I think it speaks volumes about the great returns Ed had running this fund,” he said.
“The nice thing about this is there is a lot of similarity in terms of how we developed as investors. Ed was also a graduate at Standard Life and had a very similar career path to me. I think there is a lot of similarity between our training and a lot of similarity between how we see markets.”
“Individuals all have their own talents and intellect and I think, contrary to popular belief, fund management is an incredibly creative role as we are all trying to understand the future. Fund management is the large part science, like our approach, but there is a little bit of art to it as well.”
He added: “Where you will start to see differences is in some of the ways we use that art.”
In fact, the manager says he has already started making the odd change to the portfolio.
“I’m really familiar with our securities and I have been up and running on the team for four months and I’ve been working with the global equity team for the last two and a half years, so there is nothing new or unexpected in the portfolio,” he explained.
“But markets are alive. Markets haven’t gone into stasis because we have changed managers, so I’m alive to markets at the moment and I’m responding to what is happening out there. I’ve been able to add to some securities that were held already in the fund as we don’t think the short-term noise of macro movements will matter in the long run.”
“So I’ve made some changes, but they have been very incremental.”
While McCoy has a strong track record as manager in the past, a number of groups have removed Standard Life Investments UK Equity Unconstrained from their recommendation list following the change in manager. One of which is Gill Hutchinson, head of investment research at City Financial’s The Adviser Centre.
However Hawksmoor’s Richard Scott, who also listened into the webcall, says investors in the fund shouldn’t necessarily sell given McCoy’s expertise.
“It is testimony to the strength in depth of Standard Life's UK equity team that they can lose someone of the calibre of Ed Legget, and fill the void with such a credible replacement – although I think there was some serendipity involved as well given McCoy’s past experience on the fund,” Scott said.
“I certainly formed a positive impression of McCoy from this general introduction, but more importantly was reassured about the strength of the UK equity team given our substantial positions in his colleague, Thomas Moore's UK Equity Income Unconstrained fund.”
Performance of fund versus sector and index under Moore
Source: FE Analytics
Thomas Moore uses the same benchmark-agnostic value style (albeit with an income mandate and focus on dividend growth) on his £930m UK Equity Income Unconstrained fund and, as the graph above shows, it has been the fourth best-performing portfolio in its sector since he took charge in January 2009 with returns of 216.22 per cent.
While Scott won’t be using the fund yet, he says he will keep Standard Life Investments UK Equity Unconstrained on his radar.
“While McCoy has sound credentials, as we already invest with the team with Moore there is no pressing need for us to consider McCoy’s fund. We have other growth funds we like and are doing well – e.g. Miton UK Value Opportunities,” Scott said.
He added: “I thought it was highly commendable that McCoy spoke so highly of Legget, even to the extent of suggesting listeners support him at Artemis – that and his charity work suggest McCoy’s a great guy as well as a good investor.”
Standard Life Investments UK Equity Unconstrained has a clean ongoing charges figure of 1.15 per cent.
