Pace of recovery key, says SVM manager

Unlike some stockpickers, Veitch says he does not rely on a quantitative screen as the key determinant in ferreting out possible acquisitions. Instead a mix of understanding companies through experience of dealing with company management, and taking a view on what a business is worth relative to its share price at any given moment, will determine whether to buy or sell a holding. The macroeconomic environment is important too, albeit the portfolio relies on stockpicking rather than thematic investments.

“There is no quantitative screen, it’s really a question of experience, a lot of it drawn from our meetings with companies, whether it is what a company says about its competitors, environment, or relationship with suppliers or customers,” Veitch says.

“Each one of our stock holdings has a price target attached to it, which is our view of what the value of that business is. Values of stocks in the portfolio go up and down as the fundamentals change, but we set a price target and when the stock reaches that we move on and do something else.”

Q: Do you apply a stop-loss strategy?

A: More not often than not if things do go down 25 per cent relative, then we do look to perhaps exit our positions, but there’s no hard and fast stop loss methodology deployed on the funds, because we believe small caps in particular can move for so many issues that are unrelated to their fundamentals.

Q: Is there a typical holding period?

A: It is something we really don’t pay a great deal of attention to, because holdings are always determined by intrinsic value. So, in 2006, when the fund was up 38 per cent invariably a lot of stocks hit their price targets and the holding periods were lower. Equally given the volatility in the past six months, our holding period is a bit shorter, because we’ve tried to add value for our unit holders by utilising that volatility.

Q: Are you looking for any sectors in particular?

A: It really comes down to the individual stocks, albeit in a framework whereby we try to control the portfolio diversification from an economic perspective. We don’t believe that index sectors, [or] sectors overweight/underweight are a great way to run a fund, on the basis that classification is effectively purely arbitrary [and] down to how somebody in the FTSE classifies that particular stock, which may have no relation to its underlying economic exposure.

Q: Do broader questions of the UK economy and parts thereof that a company may be exposed to make up part of your search for hidden value?

A: It does but it is by no means the overriding factor. Anybody who manages money in some way, shape or form, even if they are purely bottom up, takes account of the macro environment.

At this point of time we are still cautiously optimistic as to the outlook for equity markets, primarily driven by the amount of monetary and fiscal stimulus out there, allied to the inevitable restocking cycle.

The issue really is what shape their recovery will take: I think it will very much be a two speed one, where those economies that have been perhaps most exposed to the credit bubble, ie, the Anglo-Saxon and peripheral European economies, growing much slower than developing economies.

Q: What about cash levels in the fund?

A: It fluctuates quite dramatically as it’s dependent on the opportunities we are finding.

The cash position that might have looked quite high at the end of the month (June) its down now, having utilised some of the weakness in the early part of July to buy back into some stocks, for example, Aquarius Platinum, which was a stock we owned previously at a level substantially above that currently (end July) and we’ve been buying back into that. And we supported the GKN rights issue.

Q: As you invest across the market cap scale, and given the way you look for value in stocks, are you likely to hold more small and mid cap stocks?

A: At this point in time we’ve only got about 15-20 per cent in large cap stocks. But, last year was a chastening experience for all of us; I think what we’ll find in terms of managing risk better going forward will be increasing large cap exposure at times we feel it will be appropriate, primarily when we feel the market is approaching a top or the outlook is less certain.

Q: As regards individual holdings, does more recent stability in the market make it easier to make the calculations on whether to buy?

A: I think there are two issues. Albeit the economic environment is pretty poor stability really stops stocks falling off a cliff, and that enables companies and investors to have a better grip of numbers going forward. Because of that there is none of that unremitting share price collapse.

I think we’ve seen the lows of this recession. That gives people more confidence that, albeit that they may have rebounded somewhat, there’s a level below which share prices will not fall.

A lot of the easy money has been made, because a lot of stocks were priced for depression at the end of 2008, the bond market was priced as if we were going to have deflation for the next 10 years.

That Armageddon scenario is over, things have normalised a bit.