Exiting positions in longstanding holdings, deciding what to do with oil & gas exposure and buying into banks like Lloyds for their expected income streams were some of the toughest decisions that the industry’s best fund managers faced in 2015.
On 14 April, the FE Alpha Manager Awards will gather some of the finest talent in the asset management industry under one roof to celebrate their achievements and hand out a collection of prizes to those that have gone through an especially good 12 months.
A full list of the 79 managers nominated in 16 categories – which include FE Alpha Manager of the Year, Best in UK Equity and Best in a Bear Market – can be found here.
In the meantime, however, we caught up with some of the nominated managers to get their view on what happened across the course of 2015 – starting with the toughest investment call they had to make over the year. 
Neil Woodford – Woodford Investment Management
In December, Woodford (pictured) exited his position in aircraft engine manufacturer Rolls Royce after holding the stock for almost a decade in his former Invesco Perpetual funds and the CF Woodford Equity Income and Woodford Patient Capital portfolios he now runs at his own asset management house.
He had been adding to the company on share price weakness following a number of profit warnings but sold out completely after November’s trading update suggested that the operational problems affected its military aerospace and marine businesses had spread to the core civil aerospace business. This led to “material downgrades to profit and cash expectations”.
Performance of stock vs index in 2015
Source: FE Analytics
“Rolls-Royce is a very long-term business which is sensitive to assumptions around manufacturing and servicing costs and operational metrics such as the number of hours flown, reliability and operational longevity,” Woodford said.
“Our decision to sell the shares reflected a significantly increased level of uncertainty about how these metrics will play out over the next three to five years in a way which will benefit Rolls’ shareholders. In many ways we hope we are wrong, but we continue to believe that it is in our investors’ best interests to exercise caution for now.”
Richard Woolnough – M&G Investments
Woolnough, who runs the £15bn M&G Optimal Income fund as well as the M&G Corporate Bond and M&G Strategic Corporate Bond portfolios, highlights his decision to maintain his short-duration positioning at a time when government bonds were rallying as his toughest call of 2015.
“It felt good being short in the spring when bund yields went from zero to 1 per cent, but it has been uncomfortable since then,” Woolnough – who won the FE Alpha Manager of the Year prize at last year’s awards – said.
“We still believe in the position because we think returns going forward are more likely to be driven by credit rather than further compression of government bond yields. Inflation in the US could potentially take off this year and the market isn’t pricing that in.”
M&G Optimal Income’s interest rate duration is currently at its lowest ever level at around two years, as the manager continues to believe that the risks of taking duration outweigh any potential rewards.
Chris Reid – Majedie Asset Management
Reid’s £1.1bn Majedie UK Income fund focuses on companies that are currently unloved by the wider market but where the manager sees the potential for a positive transformation while an acceptable dividend is being paid to investors.
“That means we spend most of each day shifting uncomfortably in the seat,” Reid said.
“Buying Lloyds all through the back end of last year has been really hard because the banks sector is widely reviled and because of PPI people just don’t seem to believe Lloyds is through the worst. Although the jury is clearly still out on Lloyds, with potential income coming to us of circa 8 per cent over the next 12 months, I think that will prove to be one of this fund’s best decisions.”
Performance of stock vs index in 2015
Source: FE Analytics
Lloyds Banking Group returned to the dividend register last year, after halting payouts to shareholders following its bailout by the taxpayer in the wake of the global financial crisis. This has led some UK equity income funds to return to the stock, although only 6.93 per cent of the sector’s members currently count it as a top 10 holding.
Christopher Metcalfe – Newton Investment Management
Metcalfe says a tough call in 2015 was making a European stock one of the largest holdings of his £1.7bn Newton UK Income fund. Netherlands-based global information services company Wolters Kluwer is currently the portfolio’s top holding with a 6.4 per cent weighting.
“We will buy overseas holdings in the fund if we see exceptional value: Wolters Kluwer fitted that description,” he said.
“It had a good spread of capital light businesses in its four divisions; it was over the worst in transforming the business from print to digital and had started growing the top line again. Against this backdrop the free cash yield just looked far too high and we made it into one of the biggest overweight positions in the fund.”
Luke Kerr – Old Mutual Global Investors – and Julian Fosh – Liontrust
Last year was dominated by falling prices in oil and other key commodities, which had a negative impact on the companies involved in the extraction and refining of these materials.
Performance of indices over 2015
Source: FE Analytics
Luke Kerr, who runs the Old Mutual UK Dynamic Equity fund, says deciding what to do with exposure to these area was a key concern for many managers last year.
“I suspect the toughest call for many managers last year was what to do with their oil, mining and industrial shares,” he said. “We were fortunate to enter the year with negligible exposure to these areas and maintained this position throughout the year.” 
Not all FE Alpha Managers steered clear of these parts of the market, however. Anthony Cross and Julian Fosh (pictured) are overweight oil & gas in their £207.8m Liontrust UK Growth fund but Fosh said “sticking with oil stocks, despite falling cash flow returns and share prices” was the toughest call they had to make in 2015.
Mark Asquith – Somerset Capital Management
Asquith, the lead manager of the PFS Somerset Emerging Markets Small Cap fund, highlights maintaining an underweight to China when it was “going through the roof” in the first half of 2015 as a difficult call. The fund has 5.3 per cent in China, compared with a 24.3 per cent weighting in its benchmark.
The Shanghai Composite surged in the opening six months of the year, only to fall sharply on the back of concern over China’s economic wellbeing and government efforts to halt early drops in equity prices.
Performance of indices over 2015
Source: FE Analytics
“Over the period, the fund fell 2 per cent while the index rose 10 per cent. We outperformed in the falling second half of the year but it didn't compensate for this painful hit,” Asquith said.
“The bottom-up stock opportunities simply weren't attractive to us. Although valuations have improved we still find the companies and industry landscapes broadly unappealing.”
