A: The fund is sold as a European equity fund, so there is no specific asset allocation other than European equities. It’s essentially 100 per cent invested all of the time. There is one occasion when I have had it up to 8 per cent cash, autumn 2007, because I was moving the fund from quite an aggressive to a more defensive position (Tim McCarron pictured left).Q: How do you manage risk?
Mainly with reference to what I think are the three principle risks relative to the benchmark.
The first is economic risk and sectoral positioning, which I track constantly, because generally the times when the fund has done best, when it has had the largest amount of Alpha, was by stock selection rather than sector selection. When the fund has done well the reason is it has had good stock selection within sectors, a specific idea within a sector that has done well, rather than it being overweight cars or something.
The second one is country risk. This is less important that it was prior to the introduction of the euro, but it is still important to the non-benchmarked countries. As much as 25 per cent of the fund can and has been in Eastern Europe and other and these can be sensitive to currency movement.
The third risk is size and market cap. I look at it by comparing my holding in the top 100 against the benchmark, what is my holding in the mid 250 and small cap and non-benchmark stocks.
It is a fairly high tracking error fund. It is not particularly looking for benchmark-plus-2 per cent, it is a higher tracking error than that. We are aiming certainly higher than 3 per cent, probably more in the 5-10 per cent range.
Performance of Tim McCarron versus his peers
Q: How much attention to you pay to macro issues such as ECB decisions or eurozone growth?
A: I do not try to spend to much time on macro. But, if there is a big theme unfolding, usually it is confirmed by bottom-up views.
Q: What factors do you believe explain your longer-term performance as a manager?
A: When the fund outperforms it is almost always because of good stockpicking and that is because of our deep research base.
Q: Early in the second-quarter of 2009 the fund was heavily exposed to financials. Are you still bullish this way?
A: Although I am overweight financials I am underweight in distressed bank, and that is the group that really drove the rally from March through to the end of May. The market is changing a bit, we are more in a range, and things are working better, in the sense that some of the banks that should never have gone up are going down, which is nice to see.
I am still pretty positive on financials. I like the insurance stocks; the non-life and reinsurance businesses, where volume contracts somewhat, but not any more than GDP.
Q: The portfolio data suggests you prefer top-three companies by market dominance in their respective sectors. Is this part of an ongoing strategy?
A: While I would agree they have the characteristics of being domestic market leaders, what I would say is that there are three types of company I tend to look for.
One is undervalued stocks, which could be things where people have really picked up on some valuation anomaly. These tend to be SMEs, so probably will not fall into category of sector leaders.
The second group - growth at the right price - will though. You want to find companies in that group that have established a level of dominance or strong industry leadership that means that if the industry is growing they can participate at super normal rates in that growth.
The third category, turnaround situations, tends to be a more eclectic mix, including cyclicals. Ideally, I would favour an industry-dominant type player even in that as well.
Q: Does the fund appeal to a certain type of investor?
A: It should appeal to people who want a Europe ex-UK fund.