Managers who put all their eggs in one basket and hold a significant proportion of their portfolio in a single company are exposing investors to serious risk, says FE Alpha Manager Leon Howard-Spink
Howard-Spink, who heads up the FE five crown-rated Schroder European Alpha Plus
fund, points to the unpredictability of BP and the banks in recent years as evidence of this.
"I think the key to success is making a series of little decisions, rather than making one huge bet and hoping it pays off," he said.
"It doesn’t matter how strong a company’s balance sheet is or how good the management is – there are many things in this world that are completely unforeseen, and any business can surprise you."
"It could be a sudden regulatory change, a natural disaster, a fire at the plant or the management may be fixing the books – anything can happen."
No company in Spink’s FE five crown-rated portfolio has a weighting of more than 4.1 per cent, and the manager says more than 4.5 per cent would be extremely rare.
"When you get to 7 or 8 per cent, that’s when I’d really start to worry," he commented.
"If you look at something like the BP crisis, which arguably wasn’t actually the company’s fault, it shows that shareholders can lose a lot of money on the downside without actually making a mistake or misjudgement."
He points to one of his own stocks – Intelsat, an operator of satellites – as a recent example of why it pays to be diversified.
"The company was one of my favourites in the portfolio just recently, but in the past few months it has been extremely painful," he explained.
"As far as I was concerned it was bulletproof – there are massive barriers to entry in the satellite market and this was the key player."
"However, it has lost more than 20 per cent this year for a whole host of reasons."
"I haven’t actually sold out of it completely because I think it’s fallen too far too fast, but I’ve scaled down my position."
"If you’d told me that a year or two ago I would have been very surprised, which is why it is important not to be too aggressive with a single company."
Despite Howard-Spink’s emphasis on diversification, the manager runs a concentrated portfolio of 45 stocks.
However, few have less than a 1.5 per cent weighting, meaning that all contribute to the fund’s returns.
Performance of fund vs sector and benchmark since manager’s appointment
Source: FE Analytics
This approach has served Howard-Spink well; according to FE data, his £660m portfolio has returned 42.01 per cent since he took over – more than twice as much as its Europe ex UK sector average during this time, and almost 20 per cent more than its FTSE World Europe ex UK benchmark.
The fund has also beaten both performance measures over one, three and five years, with less volatility.
In spite of the various headwinds that are currently facing Europe, the manager thinks the market is cheap and attractive on a long-term basis; however, he is not as gung-ho as some of his rivals.
He commented: "If you’ve got your life savings in euros I can understand why you’re worried, because the future of the single currency is, clearly, in doubt."
"However, the upside potential from the current levels is massive. We’ve been through tougher and come out the other side."
"That said, I do think we are at a stage where you can't abandon quality companies and just buy anything; certain companies and sectors are cheap for a reason. Just because something is cheap it doesn’t mean it can’t fall further, so my emphasis remains on stable companies."
Howard-Spink targets market leaders that can "beat the fade" and stave off competition, highlighting Essilor – a company that creates a third of the world’s spectacle lenses – as a good example.
Schroder European Alpha Plus has a minimum investment of £1,000 and a total expense ratio (TER) of 1.68 per cent.